Junk bonds, also known as high-yield bonds, are debt securities issued by companies or governments with lower credit ratings or higher risk of default compared to investment-grade bonds.
Junk bonds offer higher yields to compensate investors for the increased credit risk associated with lower-rated issuers. Junk bonds are typically issued by companies with below-average credit ratings, undergoing financial distress, or operating in volatile or cyclical industries. While junk bonds provide investors with higher interest income potential, they also entail greater risk of default or loss of principal compared to investment-grade bonds.
Junk bonds have advantages such as higher returns, diversification benefits, and potential capital appreciation in improving economic conditions or turnaround situations. However, they also have disadvantages such as higher default risk, price volatility, liquidity constraints, and susceptibility to economic downturns or adverse market conditions. Understanding junk bonds is essential for fixed-income investors, portfolio managers, and risk-conscious investors evaluating risk-return trade-offs, credit analysis, and asset allocation decisions in bond markets.