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. ...