Why Invest in Corporate Junk Bonds?

Investing in corporate junk bonds has become increasingly popular over the years. A corporate bond is a debt instrument that is offered by corporations to investors. This bond allows investors to bring in a regular interest payment from their investment. Here are a few things to consider about junk bonds and why you would want to invest in them. 

Corporate Bond Ratings

In order to understand what corporate junk bonds are, you first need to understand bond ratings. Popular financial experts, like Standard & Poor's and Moody's, offer ratings on every corporate bond that is available in the market. For an investor, this can be a very valuable tool. 

Corporations have credit scores just like people do. When a person wants to borrow money, the lender gets to look at their credit score first to decide if they want to give them the money. When a corporation wants to borrow money from individuals, the individual investors will not be able to look at the company's credit score. This is where the bond ratings come into play. If the company has a high rating, this is like saying that they have a good credit score. According to the experts, they are a good credit risk and you should not be afraid of losing your investment with them. 

Companies that do not have as good of a credit score get a lower rating. This means that they are a higher credit risk to potential investors according to the experts. The scale gives a rating of AAA to the best of the best in the bond market. The scale goes down all the way to D for the extremely risky companies. According to Standard & Poor's rating system, anything below a BB rating is considered a junk bond.

Why Invest in Junk Bonds?

With this information, you may be wondering why anyone would want to invest in a company with a higher perceived credit risk. However, to understand that, you only need to understand one of the basic rule of investing. If you take on higher risk, you can get a higher reward. Companies that are rated as junk bonds, will pay a higher rate of return on their bonds. This means that if you are willing to take on the risk that the companies represent, you can get a much higher rate of interest than you could with a AAA bond. 

Therefore, in order to decide whether or not you would want to invest in junk bonds, you need to decide what your personal risk tolerance is. If you want to make a higher return, you may want to consider going for junk bonds. If you value safety over the potential of a high return, they you should probably stick with the higher-rated bonds. 

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