Junk Bond

Junk bonds are normally classified as bonds with credit ratings lower than investment grade bonds. Due to their higher risk of default, they pay a higher yield than investment grade bonds.

The yield spread between investment grade and junk bonds fluctuates depending on the state of the economy, as well as company and sector-specific events. During prosperous times, the yield spread may become rather small, and may increase during periods of distress.

Investors can gain exposure to junk bonds via funds that invest in bonds. Despite their higher risk of default, investors are expected to be compensated by the higher yield.