Junk Bond

A debt security that pays investors a high interest rate because of its high risk of default. Junk bonds aren't for everybody or even most people, but they aren't all bad. They provide less than rock-solid firms with access to credit, and a broadly diversified portfolio can reduce the risk of any one bond's default while providing high portfolio interest. But beware: junk bonds really are risky. In addition to the unusually high credit risk (and the usual interest-rate risk associated with all bonds), junk bonds are susceptible to the winds of economic fortune. When a downturn is anticipated, many investors shun the bonds of companies that might not be able to pay interest or principal if business should turn sour. Thus, the price of your junk holdings would fall under such circumstances. Given the uncertainties, some junk-bond investors prefer a good mutual fund, which will do the work of credit analysis and diversification for you.

 

 

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