Junk bonds are also known as 'high yield', 'non-investment grade', or 'speculative' bonds. They are usually issued by companies without well-established records of earnings, and so have to offer higher rates of interest to compensate for a greater probability of default on those interest payments.
The rating is determined by the main credit rating agencies: Moody's, Standard & Poor's, and Fitch. Junk bonds are also used by small firms to finance takeovers of larger companies, particularly in the US. Firms with investment grade (BBB- or better, according to S&P's system) bonds can be downgraded to junk status if they hit difficulties. These are called 'fallen angels'.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Revolut launches its first stocks and shares ISA with BlackRock and Vanguard ETFsA year after getting its UK banking licence, Revolut is now launching its first stocks and shares ISA with a suite of exchange-traded funds (ETFs) from BlackRock and Vanguard.
-
What does Trump’s ‘Big Beautiful Bill’ mean for the US economy?Donald Trump’s budget bill will slash taxes, but is expected to add at least $3 trillion to US national debt
