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Junk Bond: High-Yield, Higher-Risk Corporate Debt Explained

By Imperialpedia Staff

A junk bond — more formally called a high-yield bond — is a bond rated below investment grade by credit rating agencies. Because the issuer is considered more likely to default than an investment-grade issuer, junk bonds pay a higher interest rate to compensate investors for that added risk.

How Credit Ratings Determine the Label

Credit rating agencies assign letter grades reflecting an issuer's perceived ability to repay its debt. Bonds rated below a certain threshold (commonly BB+ and lower, or the equivalent from a different agency) are classified as high-yield or "junk," while bonds above that threshold are considered investment-grade.

Why Investors Buy Them Anyway

Junk bonds offer meaningfully higher yields than investment-grade bonds of similar maturity, which appeals to income-focused investors willing to accept additional credit risk. Many investors access this asset class through diversified high-yield bond funds rather than individual bonds, spreading default risk across many issuers.
IMPORTANT
Junk bond prices tend to be more sensitive to the issuing company's own financial health and to the broader economic cycle than high-quality government bonds, and can behave more like equities during periods of economic stress.

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