Junk Bonds

Learn about Junk Bonds with iMinds Money's insightful fast knowledge series. 

Junk bonds are bonds with a potential for high returns but which also come with many risks. A junk bond is like an IOU from an organisation that states the amount it will pay you back, the date it will pay you back and the interest it will pay you back. But what truly sets junk bonds apart from similar investments is the credit quality of their issuers. Whereas lenders of investment-grade bonds are financially reliable, a lender of junk bonds does not have a stable financial past.

When one says that junk bonds are high risk, what is meant is that if you purchase a junk bond there is a chance you will never get your money back. This is because the finances of the issuer are regarded as so insecure that there is serious doubt as to whether it can pay the interest and redemption payments. And to add to the risks, many junk bond funds do not allow investors to cash out for one to two years. Therefore, investing in junk bonds requires a lot of analytical skills, including knowledge of specialised credit.

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