ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A junk bond is debt that has been given a low credit rating by a ratings agency, below investment grade. As a result, these bonds are riskier since chances that the issuer will default or experience a credit event are higher.

Detailed explanation-2: -Junk bonds carry a higher risk of default than other bonds, but they pay higher returns to make them attractive to investors. The main issuers of such bonds are capital-intensive companies with high debt ratios, or young companies that have yet to establish a strong credit rating.

Detailed explanation-3: -Default risk. Junk bonds are riskier than investment-grade bonds because they’re issued by companies that are on less stable financial footing. They have higher default rates than investment-grade bonds.

Detailed explanation-4: -However, junk bonds typically have greater default risk than their investment-grade counterparts because issuers may be less likely to cover interest payments and loans by the maturity date.

Detailed explanation-5: -Bonds rated below Baa3 by ratings agency Moody’s or below BBB by Standard & Poor’s and Fitch Ratings are considered “speculative grade” or high-yield bonds. Sometimes also called junk bonds, these bonds offer higher interest rates to attract investors and compensate for the higher level of risk.