Which type of bonds offer a higher yield?
Bonds are fixed-income instruments representing a loan made by an investor to the government or corporate. It is an I.O.U between borrower and lender that includes details of its payments and loan.
Junk Bonds are corporate debt securities that pay higher interest rates to the lender. The bonds are issued by startup companies or capital intensive firms with high debt ratios.
They have low credit rating than investment-grade bonds, therefore they pay higher rates. The credit rating is below Baa3 from Moody's or below BBB- from S&P. The probability of default of junk bonds is high so they must pay a higher yield compared to investment-grade bonds to compensate the investors.
Junk Bonds are also called High Yield Bonds.
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