Junk bonds, also known as high-yield bonds, are debt instruments issued by companies or government that are considered to have a higher risk of default on their debt compared to investment-grade bonds. These bonds are assigned credit ratings by rating agencies like Standard & Poor’s (S&P) and Moody’s.
Key
features of Junk Bonds (BB Rated):
· Higher Interest Rates: To compensate investors for increased risk of
default, junk bonds typically offer higher interest rates compared to
investment-grade bonds. The BB rating might indicate a slightly lower risk and
potentially a slightly lower interest rate than bonds rated B or below.
· Increased Volatility: The value of junk bonds can fluctuate more
significantly than investment-grade bonds due to changes in market sentiment,
creditworthiness of the issuer and overall economic conditions.
· Investment Suitability: Junk
bond, especially those with a BB rating, are generally suitable for investors
with a higher risk tolerance and a longer investment horizon who can withstand
potential price fluctuations and the possibility of default.
· Portfolio Diversification: Including a small allocation of BB-rated junk bonds
in a diversified portfolio can potentially enhance returns, but investors
should carefully consider their risk appetite and investment goals.