Junk bonds

Junk bonds are also known as 'high yield', 'non-investment grade', or 'speculative' bonds.

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'.

See Tim Bennett's video tutorial: Bond basics.

Most Popular

Prepare your portfolio for recession
Investment strategy

Prepare your portfolio for recession

A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, sa…
27 Jun 2022
Market crash: have we hit bottom or is there worse to come?
Stockmarkets

Market crash: have we hit bottom or is there worse to come?

For a little while, markets looked like they were about to embark on a full-on crash. And that could still happen, says Dominic Frisby. Today, he look…
27 Jun 2022
What the end of the 1970s bear market can teach today’s investors
Stockmarkets

What the end of the 1970s bear market can teach today’s investors

The 1970s saw the worst bear market Britain has ever seen, with stocks tumbling 70%. Things have changed a lot since then, says Max King. But there ar…
28 Jun 2022