Junk Bonds are high-yield bonds issued by companies with lower credit ratings, typically below investment grade (below BBB- as rated by agencies like S&P or Fitch). These bonds offer higher interest rates to attract investors, compensating for the greater risk of default. While they can provide attractive returns, junk bonds are considered speculative and are best suited for investors with a higher risk tolerance and strong market understanding.

The key characteristic of a junk bond is its higher yield relative to safer investment-grade bonds. This is because issuersóoften companies with weak financial positions, heavy debt, or limited cash flowómust offer higher returns to offset investor concerns about repayment risk. Junk bonds are traded in both primary and secondary markets, with their prices fluctuating based on issuer performance, credit ratings, and overall market conditions.

Investors may choose junk bonds for portfolio diversification and potential income generation, especially during periods of economic expansion when default risks are relatively low. However, during market downturns or tightening liquidity, these bonds can experience sharp price declines, reflecting the heightened default risk. Itís crucial to assess the issuerís financial health, credit rating changes, and broader economic factors before investing.

From a regulatory standpoint, junk bonds are legitimate investment instruments when traded through authorized exchanges or mutual funds regulated by SEBI. Investors should exercise caution, avoid overexposure, and consider professional financial advice before investing. Overall, junk bonds can enhance returns within a diversified portfolio but should be approached with thorough due diligence and risk awareness.

In summary, junk bonds provide higher potential rewards in exchange for higher risk. Understanding their structure, credit quality, and market behavior is essential for making informed investment decisions in the fixed-income space.