Junk Bond (Noninvestment Grade)

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In the world of corporate bonds, there are two broad types: investment grade, which describes bonds that are top quality; and noninvestment grade, which describes bonds that are not as high in quality and therefore are more risky. While people usually refer to the high-quality bonds as investment grade, hardly anyone calls noninvestment-grade bonds by their proper name; instead they usually refer to them as "junk." This can be a rather unfair description; junk sounds bad, but not all "noninvestmentgrade" bonds are equally bad. Junk bonds cover a very wide range of quality: certainly some are very risky investments, with a high possibility of default, but many are not. Why would anyone buy a risky junk bond when they could buy an investment grade bond? Because in order to get investors to buy junk bonds, the issuers offer a coupon rate that is usually significantly higher than the rate offered by investment grade bonds.