“Junk” bonds are considered higher risk and lower quality than other bonds. Because of this, they promise a higher interest rate than normal. So, the higher rate gives you the possibility of higher returns but it also comes with a greater risk of default.
Junk bonds get the name “junk” from their low bond credit ratings. Companies like Standard & Poor’s and Moody’s Investors Service rate bonds to measure their riskiness – the lower the risk, the higher the quality, and vice versa. S&P’s “AAA” or Moody’s “Aaa” are the highest ratings a bond can get. Highly rated bonds are called investment grade. Anything below BB or Bb is deemed junk.
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