Posts Tagged ‘high-yield bond’

What’s the difference between a regular bond and a junk bond?

Friday, October 2nd, 2009

“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.