Why are junk bonds a good investment?

Junk bonds are also known as high-yield bonds because the interest payments are higher than for the average corporate bond. Companies that issue junk bonds pay high interest rates to entice investors to take on the greater risk of lending them money. An investment-grade credit rating denotes little risk that a company will default on its debt.

What is a junk bond?

A junk bond, also known as a speculative-grade bond, is a high-yielding fixed income security with a high risk of default on payment. When you buy bonds, you’re lending money to the bond issuer—a company or a government entity—that promises to pay you back with interest when the bonds mature.

Do junk bonds carry risk?

Junk bonds carry risk since investors are unsure whether they'll be repaid their principal and earn regular interest payments. As a result, junk bonds pay a higher yield than their safer counterparts to help compensate investors for the added level of risk.