Junk Bonds Definition

The junk bonds definition, also known as high-yield bonds, is that of high-risk bonds that certain corporations offer. A bond is a certificate of debt. Sometimes a corporation will sell bonds in exchange for money. The bond is an understanding that the money will be paid back, so this is not an investment but a debt for the corporation.

Financial experts will analyze the bond and give it a rate based on the risk to the bondholder, the person lending the money to the corporation. Certain factors are considered when rating a bond: the nature of the business, the financial holdings, the number of employees, and how long the corporation has been in business. If the risk is high for the bondholder, then the corporation will be given a low rating.

If the corporation is rated low, they must offer the bondholder a high-yield loan because they will need the income from the bond while higher rated corporations do not. These high-yield bonds are junk bonds, because they are issued by corporations that have yet to prove their worth. Junk bonds are not insured. If a corporation declares a bankruptcy then the bondholder who holds the junk bond may loss all or a portion of their investment.

Junk bonds can be worth the increased risk, though. If a corporation's rating upgrades, then the junk bond’s value increases. Also junk bonds also help young corporations start out by giving them capital. Conservative investors do not find junk bonds a sound investment, but the riskier investor looking for a quick profit will find junk bonds appealing.

References: 

www.econlib.org/library/Enc/JunkBonds.html

law.jrank.org/pages/7900/Junk-Bond.html