What are junk bonds? Are they really junk?

Bonds issued by governments or corporations that carry a credit rating below the investment-grade level are commonly known as junk bonds.

Although the name may sound alarming, many of the issuers behind these bonds are still capable of meeting their debt obligations. However, due to weaker financial conditions or uncertain outlooks, they are considered more likely to default compared with higher-rated, investment-grade bonds. Because of this increased risk, junk bonds typically offer higher yields to attract investors.

As with other types of bonds, individual investors can purchase these securities through their brokerage accounts. In some cases, certain brokers may require investors to place the order by phone rather than directly through the trading platform.

Another way to gain exposure to junk bonds is by investing in high-yield exchange-traded funds (ETFs). These funds hold a diversified collection of bonds issued by different companies or governments and often vary in credit quality and maturity. Investors can buy or sell these ETFs easily through their brokerage accounts, just like regular stocks.

What Else Should You Know About Bonds?

If you want to deepen your understanding before deciding how much of your portfolio should be allocated to bonds, it can be helpful to explore additional educational resources and articles covering bond markets, risk levels, and investment strategies.