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Investing In Junk Bonds

By Edited Apr 17, 2016 0 0

Junk bonds, are high yield bonds that have a high risk of default. Junk bonds otherwise known as non investment grade bonds, are highly speculative and risky. If you know how to look for the right bonds though, you could make a ton of money. In this article I will show you how to invest in these types of bonds.


What is a Junk Bond

Bonds are promises or loans. An investor lends money to a person(the bond issuer) and the person promises to pay back the loan with interest. Junk bonds are bonds that are very risky and have a high chance of default meaning that there is a high chance that the bond issuer is not going to pay back the loan. There are a few agency's that rate bonds. These agencies give a rating based on data. Below is a chart to show different ratings and what they mean.


Standard & Poor's
AAA Aaa AAA Investment Low
AA Aa AA Investment Low
A A A Investment
BBB Baa BBB Investment
BB Ba BB Junk
B B B Junk
CCC Caa CCC Junk
CC Ca - Junk
C - - Junk


As you can see there are 3 main rating agency's, Standard & Poor's, Moody's and Fitch. Each company has a different way of writing a rating. For example Moody's write's the safest rating as Aaa and Fitch writes their safest rating as AAA. Next to the 3 companies ratings is a grade to show what type of investment it is. As you can see there are two types of grades shown in this chart, Investment grade and Junk grade. Junk bonds are basically all the bonds below  the BBB rating. Next to the Grade is the risk and it shows the risk level associated with each rating. Everything BBB and below is rated high or in default meaning junk bonds are the riskiest investments. Most of the companies rated AAA-BBB are safe and sturdy company's such as GE. The company's rated in the BBB-D range are companies like Sprint.

Junk bonds are very risky, but if you know what your doing, and you do thorough research, you should be able to make money.


How To Invest

Not all brokerages allow investors to invest in Junk bonds, many people consider junk bonds to be too risky, and most brokerages that sell the bonds, make you sign a disclaimer, saying that you are aware of the risks. The Amount of Junk bonds available to purchase depends on your brokerage, some brokerages list a long list of bonds while some list a short list. If you are uncomfortable investing in junk bonds or are unable to purchase them, you can always purchase a fund that buys them.PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) is just one of the many funds that invest in junk bonds.  Some of these funds do very well, and have earned double digit returns.



What To Buy

When looking at a junk bond to buy make sure you do your research, this means reading the companies annual reports and understanding the business. It is very easy to make a mistake when researching a company. Some key things to look for are, the assets in the company, the liabilities and how much debt they have. How much money the company is making. Be wary of buying bonds in a company that is not making money. It can be very risky to buy these bonds. On top of looking at all of these facts, look at the bond too. Look at the maturity date and yield of the bond. These are all very important factors when deciding if the bond is a good deal. Be very careful in purchasing a bond with a maturity date that is far away. Many things can change in a company and it is very hard to predict the future.

Once you have found the bond you want to purchase, wait until the right time to buy. Look at dips in the market and determine a good entry point. Your work in not over once you purchase the bond. You have to constantly check to see how the company is doing and make sure the financials are looking good. Make sure that you are fully aware at what is going on within a company, it is never good to sit on a bond when he company is losing more and more money. If you see signs of trouble sell your bonds. You never want to be stuck with a losing bond. This being said, there still is a way to make money on bonds that  are descending into bankruptcy. Some people by bonds that are going into bankruptcy at a huge discount and than wait in line to receive some money from the courts when they liquidate the company. This is an even riskier to do. I never recommend doing that because sometimes court proceedings can take years, and you may be waiting in line for a long time before you get some of your money back.






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  1. Jane McGrath "How Junk Bonds Work." How Stuff Works. 11/07/2012 <Web >

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