Definition of junk bond

Normally a high-yield bond that is below investment grade in terms of the credit ratings issued by agencies such as Moody's Investors Service or Standard & Poor's. [1]

Junk bonds are issued by companies that carry a speculative credit rating. Speculative-grade issuers usually have questionable track records, or have experienced significant events that undermine their ability to pay interest as well as the money back they borrowed.

One way of working out the riskiness of a bond is via its credit rating. The idea is that the higher the credit rating given to the bond, the less likely the company is to have problems paying you back. Investors are therefore prepared to accept a lower rate of interest for bonds because the risk that that company will default is much lower. Junk bonds carry a very high risk of default. [2]