What Are Junk Bonds?

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Junk bonds, or high yield bonds, are bonds that have low credit ratings, and therefore include an inherent risk. Be aware of a bond's credit rating before making an investment with help from a portfolio manager in this free video on personal finance and money management.

Part of the Video Series: Stocks & Bonds
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Video Transcript

Okay, so you're wondering what is a junk bond, or what are junk bonds? Junk bonds are another word for high yield bonds. Those are and junk bonds are coined because there there is inherent risk. When you buy a high yield bond, a bond that has a low credit rating, it's just as if you were to invest money, loan money to someone who is a high credit risk. These are companies or organizations that have a higher than average credit risk, and therein lies the term junk, that these bonds may not get paid back, you may not receive your money, the coupon may go down, and you could just be sitting with, in essence, junk. But really, in the industry in the certain regulations that are there bonds are a safe vehicle. You just need to be aware of what the credit rating is, because that's what you're doing when you buy a bond; you're lending someone money. So, a high yield, or junk bond is just a bond that has a lower than average credit rating. The best piece of advice I can give you is to speak with someone who is knowledgeable in the bond market, and do research online if you if you so choose, and get some advice, and and maybe get a recommendation if you're looking to buy a junk bond or a high yield bond.

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