Definition of Junk Bonds

Junk bonds are corporate bonds with comparatively lower credit ratings. The junk does not mean that they are not good for investment but they are very risky in terms of default risk. The junk bonds are just like any other corporate bonds that are normally traded on financial markets. However, the financial performance of the companies that issue these bonds is very poor that reflects the high risk of non-payment of coupons to investors.

Junk bonds are also known as high yield bonds and that is why they are cheaper than other bonds issued by companies with good credit ratings. The reason for the high yield is that the investors require a higher return for the high risk of default involved in junk bonds and the price of the bond is inversely proportional to the bond yield. The higher the yield of a bond, the lower the price will be, and vice versa.