Junk Bonds – Risking Your Money with Junk Bonds

Junk bonds get a bad rap because of their name and the reputation they developed thanks to unscrupulous investors like Ivan Boesky in the 1980’s. While junk bonds are not exactly the safest investments you will ever make, they are still a legal and legitimate way for a company to raise money. Before you jump into the world of buying junk, you need to take some time to understand the meaning of the phrase and why it has developed such a bad rap over the years. In some cases, these kinds of bonds make for some of the best investments available. In other cases, the risk is so high that the promise of a great return may not even be worth the potential loss.

Junk bonds are bonds issued by companies with a B credit rating or lower. Companies that have never issued a bond before and have bad credit are forced to issue junk bonds. The benefit to the investor is that these kinds of bonds usually carry a return rate that can exceed standard government bond returns by as much as six to eight percent. But if the company issuing the bond has a credit rating of C or D, then the risk for investing in a company like this is incredibly high. Then there are companies which are referred to as fallen angels. These are companies that had high credit ratings but then go knocked down to junk status. In many ways, the fallen angels present some of the most tempting bond offers available.

A fallen angel is tempting because there is that feeling that the company was just having a bad stretch and that better times are ahead. But when a company that used to offer solid securities is forced to offer junk bonds, it says something about the company that you do not want to ignore. You will want to do some serious research on fallen angels offering junk bonds before you make your investment. Find out what management changes have been made since the company’s collapse and become very familiar with the methods that the company intends to use to bring value back to its credit rating. If you assume the risk without doing the research then you could be out all of your initial investment.

Because junk bonds are so risky, they are usually left to wealthier investors and organizations that can afford to speculate. Junk bonds can sometimes yield double-digit returns that would make an investor a considerable profit. But they can also cost you everything if you don’t do your research first.

About Richard Wilson