Investing In Junk Bonds - What You Need to Know

List: Posted: 02/25/11

When you are looking to get into investing, you are likely to encounter a number of different investment types.  One common bond in today’s investment world is junk bonds.  These bonds are essentially like an IOU from a company or corporation that will mature and result in a full payback plus interest. 

 

Contrary to what the name implies, these bonds are not “junk” or worthless.  Instead the term refers to the credit rating of the corporation.  Junk bonds are issued by companies who have previously failed to pay back a debt or that offer some form of risk, though it is often low.

If you are considering an investment in junk bonds, you will find that you can learn the investment grade of the company offering the bond.  Junk bonds typically come from companies with a rating of BB or Ba or lower.  Because of the risk involved, however, the yields on junk bonds are often much higher than with investment grade bonds.  With a lower investment rating, it is harder for these companies to secure financing, and as a result they offer bonds with high yields to help increase capital.

At the end of the day, a junk bond can be a great investment.  It is important to always balance a portfolio with other low risk options as well, but these should certainly be considered.  A bond rating is much like a personal credit rating, and investing in junk bonds allows you to profit from companies with less than stellar credit.

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