Just like consumers, bonds are assigned credit ratings to provide investors with insight into the likelihood that the bond's issuer might default before the bond matures. Junk bonds (Also called high-yield bonds) possess a credit rating of BB or below and often feature high interest rates.
Investing in Junk Bonds
Many investors steer clear of junk bonds. Their low credit ratings indicate a short track record of performing or minimal cash reserves. They could default on the bond, which means the issuer won't be able to pay its investors when the bond matures.
However, you might want to invest in junk bonds if you possess a high risk tolerance and want to take advantage of the high interest rates. If the bond matures without default, you could make more money on junk bonds than on investment-grade bonds (those with excellent credit ratings).
Making Money on Junk Bonds
Writing for Forbes, investment manager Steve Blumenthal calls junk bonds "the investment of a lifetime." He notes that speculative or high-yield bonds often flood the marketplace during recessions, and that many pay out later.
An interest rate of 6 percent or more could make a tremendous difference in an investor's portfolio. Consumers must simply balance the risks and rewards with a diverse portfolio and pursue calculated liabilities.
Understanding Bond Ratings
As mentioned previously, bonds with credit ratings below BB present the greatest risk to investors. If a bond features a D rating, it has already defaulted, while a rating of CC or CCC indicates potential financial peril. Logically, junk bonds rated BB present the least risk on the speculative scale, but could still default based on the current economic climate.
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