“Junk” bonds are not necessarily useless, even though the name may sound like that at first. However, you should keep in mind that these bonds are not financially stable and could result in lost money if you are not careful. That being said, junk bonds can actually be a good investment if know what you are doing, and are willing to take a few risks. The reason for this is that most “junk” bonds offer much higher interest rates than other bonds, which could mean a higher payoff for you.
The only thing that makes a “junk” bond different from a regular bond is just how likely it is that the issuer will be able to pay you back. Usually, the companies that are issuing junk bonds have a much lower credit rating than the other companies on the market. Therefore, these companies are not able to offer bonds at lower interest rates, because the amount of risk would make those bonds bad investments.
There are a bunch of different rating standards. Generally, if a bond is rated at BB or worse on the Standard & Poor’s rating scheme, then it is a high risk and will be considered a junk bond instead of a good investment.
There are a few different categories of company that end up as junk bonds. The first type of junk bond is called a “fallen angel”. This company originally was a good investment, but has recently gotten into credit trouble. The result is that the company will have junk bonds until the credit rating has gone back up.
A better type of investment would be in the other type of “junk” bond, which is called a “rising star”. These companies are generally unknowns that are trying to break into the investment arena. These can be good investments if you are careful to choose a company that has a good chance of being around in another few years. However, like any other “junk” bond, you should make sure that the risk is one that you are willing to take.
You should also only invest in junk bonds if the potential return is considerably higher than the yield you would get from safer bonds. Generally, if you are not making at least 4% more than you would from a government bond, you should not invest in “junk” bonds.