Junk Bonds The debt securities of companies bearing a considerable degree of risk that is reflected in their mediocre or poor CREDIT RATINGS. Alternatively referred to as 'Low-grade' or 'High-risk' BONDS.
Junk Bonds include a wide spectrum of fixed-income securities, such as, those of
(b) companies whose ratings have fallen owing to financial woes.
Since INSTITUTIONAL INVESTORS would steer clear of Junk Bonds, the market for these securities is thought to be inefficient, thereby offering opportunities for a higher return compared to higher-grade bonds.
Perhaps, the perceived risk is greater than the actual risk. Moreover, low-grade bonds are less sensitive to interest rate changes.
An interesting strategy is to buy Junk Bonds in anticipation of an improvement in rating which would result in price appreciation. Incidentally, some MUTUAL FUNDS in the U.S. have found it worthwhile to specialize in Junk Bond investing.