A junk bond is a high-yield, high-risk debt security issued by companies with lower credit ratings, typically below investment grade (BB or lower). Due to the increased risk of default, these Bonds offer higher interest rates to attract investors. Junk Bonds are often issued by startups, companies undergoing financial stress, or those with unsteady cash flows. While they can provide significant returns, they are highly sensitive to economic conditions and investor sentiment. Investors should assess credit risk, issuer background, and market conditions before investing. Junk Bonds are commonly found in aggressive portfolios seeking above-average income.
Example:
An investor purchases high-yield corporate bonds that offer higher returns due to increased credit risk.
