Junk Bonds

When an investment opportunity carries a moniker like junk bonds, it's pretty obvious there's going to be a catch.

The catch in this instance is a risk of default, meaning there's a good chance the companies issuing the junk bonds may fail to make interest payments or repay the loan when it matures. Because of the risks, junk bonds offer higher interest rates to investors, which translate to higher returns, or yields. For that reason, they are also called high-yield bonds in more polite circles.

Who decides if they are junk? The services that offer bond ratings, the big two being Standard & Poor's and Moody's Investors Services. (Junk bonds carry ratings below triple-B, or speculative-grade ratings.) Companies' debt may be considered junk-bond status for a variety of reasons, such as if the firms have weak balance sheets or if they are very small and in speculative industries.

So, what should you do with all this junk? Many advisers suggest individual investors should avoid buying directly into junk bonds because of the risk that they'll lose big. A safer way to play the junk market is to buy a mutual fund that focuses on junk bonds.

Junk Junction

It's true, junk bonds carry big risks, but when they pay off they can offer big rewards. TheStreet.com scours through the junkyard to bring you the latest news and developments in the junk bond arena. For investors bold and/or curious, check out these articles.

Dealing With Junk in the Trunk

Hopeful on High-Yield Bonds

Junk Bonds' Strength Belies Balance Sheets

High Tide for High Yield

Coupon Clippers Eye High-Yield Funds

>To order reprints of this article, click here: Reprints