Junk bond

A junk bond is a bond that has a credit rating that falls below the investment grades.

Many funds are restricted to investment grade debt instruments and cannot invest in junk bonds. Junk bonds are obviously higher risk but offer correspondingly better returns. Many junk bonds, despite the name, are not hugely high risk investments. At the bottom end are very high risk bonds that trade at a fraction of their face value - with correspondingly spectacular gains to be made in the unlikely event that payments are made.

The highest risk bonds are obviously those in the lowest grades, which indicate that payments have actually been defaulted on.

Despite the name junk bonds can be a reasonable investment to make in the context of a diversified portfolio, as well as for speculators.

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