Investing in junk bonds can be a smart move for investors looking to maximize their return on investment (ROI) while minimizing risk. In this article, we’ll explore what junk bonds are, how they work, and whether they’re right for you.
Junk bonds, also known as high-yield or speculative-grade bonds, are debt securities with low credit ratings. These bonds typically have higher yields than traditional corporate and government bonds, such as treasury bonds.
Because they carry an increased risk of default, junk bonds offer a higher interest rate than investment-grade bonds. When you buy a junk bond, you’re lending to the bond issuer in exchange for interest payments throughout the bond’s life until it matures.
Investors buy junk bonds for various reasons, including the potential for higher returns. Since lower-rated companies typically issue these bonds, they compensate investors with higher yields than other bonds, which often pay just a few percent in interest.