What are junk bonds? Are they really junk?

 

Bonds issued by corporations or governments that have a credit rating below investment grade are sometimes referred to as junk bonds.

Despite the name, most of these companies and governments are in fact able to service their debts, but – perhaps because of their poor financial situation or outlook – a default is thought to be more likely to occur compared with investment-grade debt. To compensate for this, yields on these bonds are typically higher.

Just like with any other bonds, individual investors can buy these securities through their online brokers, although some brokers may require you to phone in to initiate a purchase.

Another way to invest in junk bonds is through a high-yield ETF (exchange-traded fund). This way, investors can have access to a portfolio of bonds that are diversified among various issuers, as well as according to credit quality and maturity. Again, buying and selling is done via your brokerage account.

What else do you need to know about bonds?

Want to learn more before deciding what’s your optimal bond allocation? You might want to check out these other articles to deepen your knowledge.

  • What is a bond?  (our main article in the bond section)
  • What is a bond yield?
  • How do bonds work?
  • What happens when a bond comes due?
  • How to invest in bonds?
  • How to buy bonds?
  • Where to buy bonds?
  • How to buy treasury bonds?
  • What is a government bond?
  • What are convertible bonds?
  • What is a secured bond?
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