Are Junk Bonds for You? A Look at High-Yield Bonds

    by Annette Thau

    Are Junk Bonds For You? A Look At High Yield Bonds Splash image

    The term “junk bonds” actually dates back to the 1920s, when it was used by traders to designate bonds of companies that suddenly found themselves in financial difficulty. These companies were also called “fallen angels.”

    At the current time, the term “junk bonds” encompasses a more diverse group of corporations than just fallen angels. It designates corporate bonds of any corporation rated below investment grade. Because the term “junk” is somewhat blunt, a large number of euphemisms are also used to designate the same bonds: They are also called “high yield,” “high income,””non-investment grade,” “speculative,” or even “high opportunity” debt. I prefer the term “junk” because it is straightforward and unambiguous.

    What sets junk bonds apart from other types of bonds is that, while junk bonds are fixed-income instruments, the primary risk factor is not interest rate risk but rather the risk that the company that issues the bonds may not survive. As a result, junk bonds tend to do poorly if the economy is in a slump, and perform better when the economy strengthens. Correlation of junk bond returns is somewhat higher with the stock market than with the bond market. But junk bonds are volatile and unpredictable securities.

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