What is a junk bond?
What is a bond
Any types of securities are issued for one purpose - to attract a certain amount of money. In this sense, bonds are no exception. In its most general form, a bond is a security that can bring its holder a predetermined income.
The issuer of bonds can be a state or a private company. The release of such obligations is carried out for a strictly specified period. The one who purchased the bond actually becomes the creditor of the issuing company.Upon expiration of the security, the issuer is obliged to pay its holder the value indicated in the nominal value, as well as the interest, referred to as coupon income.
A positive property of a bond, if we compare it with a share, is that the investor bears the risk only as a last resort, for example, if the company is officially declared bankrupt. In this sense, government securities are more reliable than corporate ones, since states are not too often bankrupt.A bond, unlike a stock, guarantees the return of invested funds together with a percentage when this security is extinguished.
The holder of the bond knows in advance what the payments will be at the time the security expires. In this case, payments may be made at different intervals during the term of the obligation: once a quarter, six months, or once a year. If the market moves up, the value of the bond may increase accordingly. But when the market falls, income remains fixed.
Garbage Bond: Increased Risk with High Income
"Garbage" is called a bond, operations with which are characterized by higher risk. This negative point is usually offset by a higher interest rate on the security, which makes the purchase very attractive to the investor. Specialists sometimes use other terms for these financial instruments, calling them "high-yielding", "junk" or "speculative" bonds.As a rule, "junk" bonds have a very low investment rating.
An investor who has decided to purchase a security in this category, in fact, is guided only by his intuition and trust in the issuing company.Such companies often do not have a long history and can not boast a solid reputation in the business world. Issuing junk and high-yield bonds for these companies often becomes one of the ways to gain market confidence.
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