What Are Junk Bonds ?
Many people when they come across the term junk bond they think that it is a scam or fraud. However, junk bond functions exactly in the same way as any regular bond would. The junk bond will specify the amount that it is taking from the investors, the time or date they will be returning it, the interest they will be paying on it and the principal. Any bond does the same thing with you money. |
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A bond is nothing but a company is borrowing money from its investors and is promising to return with a rate of interest. However, junk bonds are being offered by companies that have a poor rating in the markets.
The bonds are always characterized based on the issuer’s credibility. They just follow into one or two categories. The investment grade specifies or corresponds to the type of company that is issuing the bond. They may be low to medium risk issuers. For an investment grade bond rating, the company should be either an AAA or BBB grade. These types of bonds do not give you high returns, but they typically give you a steady income. Also, the risk of the borrower not paying the interest is very low. The companies that take the debt are usually highly reliable.
Junk bonds, on the other hand, are given by companies that can pay high yields on the money they are borrowing from you. They do it because they have no other option to attract investments.
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