What defines a Junk bond?

A junk bond is specifically defined by its high risk and potentially high yield status. These bonds are issued by companies that have lower credit ratings compared to investment-grade bonds. Because of the issuer's risk of default, investors demand a higher yield as compensation for taking on the additional risk associated with these securities.

Junk bonds are typically rated below Baa by credit rating agencies. The high yield can be attractive to investors seeking greater returns, which compensates for the elevated risk of losing part or all of their investment. In contrast to bonds that guarantee returns or hold the highest ratings, junk bonds are characterized by their speculative nature, appealing primarily to investors with a higher risk tolerance who are looking for the possibility of substantial returns.