Why Are Junk Bonds High Risk?

Why Are Junk Bonds High Risk?

1 Answer

  1. The meaning of junk bonds come from the very own characteristic of it having high risk and high yield. From a technical viewpoint, a junk bond is pretty much the same as a regular corporate bonds since they both represent debt issued by a firm with the promise to pay interest and return the principal at maturity. Junk bonds differ because of their issuers’ poorer credit quality. Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default.
    Generally, companies which issue junk bonds are typically start-ups or companies that are struggling financially. Junk bonds carry risk since investors are unsure whether they’ll be repaid their principal and earn regular interest payments. As a result, junk bonds pay a higher yield than their safer counterparts to help compensate investors for the added level of risk. Companies are willing to pay the high yield because they need to attract investors to fund their operations.

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