What makes a junk bond different is who’s borrowing the money. Junk bonds are issued by companies that do not have strong credit ratings, meaning they are considered less financially stable or have higher debt levels. Because these companies are more likely to default — that is, fail to make interest payments or repay the debt — investors demand higher yields to compensate for the extra risk.

🔍 Credit Ratings and What They Mean

To help investors understand risk, credit rating agencies such as Moody’s, Standard & Poor’s (S&P), and Fitch assign grades to bonds. Bonds rated BBB- or above (S&P/Fitch) or Baa3 or above (Moody’s) are considered investment grade, meaning they’re relatively safe.

Bonds rated below those thresholds fall into the non-investment grade category, commonly known as junk bonds or high-yield bonds.

• Example of investment grade: Apple bonds (AA+ rating) — very safe, lower yield.
• Example of junk bond: AMC Theatres bonds (2020) — higher risk, much higher yield.

💰 Why Would Anyone Buy a Junk Bond?

Despite the name, junk bonds are a legitimate investment — just with more risk attached. Investors often buy them for the potentially higher returns. In a low-interest-rate environment, for example, junk bonds can provide income that’s hard to find elsewhere.

They can also play a role in a diversified portfolio. Some investors are willing to accept a bit more risk for a slice of higher income, especially if they believe a company will turn around or survive tough conditions.

⚠️ The Risks Involved

The major risk is default. If the issuing company runs into trouble, it might miss payments or even go bankrupt. Junk bonds are also more volatile — their prices can swing dramatically based on market sentiment or news about the issuing company.

Junk bonds tend to do better when the economy is strong, and worse during downturns. That’s because weaker companies are more vulnerable when business slows.

📈 Real-World Examples

• Tesla (2017): Before it was profitable, Tesla issued junk bonds to fund the Model 3 ramp-up. Investors were attracted to the brand and growth story, even though Tesla was burning cash at the time. The bond offered a yield of about 5.3%.
• Sprint (pre-merger): Struggled with massive debt and competition in the telecom space. Its bonds were rated as junk for years due to concerns about profitability and survival.
• AMC Theatres (2020–2021): Hit hard by the pandemic, AMC issued junk bonds to raise emergency cash. Investors took the risk, betting that the company would survive — and some were rewarded handsomely as AMC's stock and bonds rebounded.

🧠 The Bottom Line

Junk bonds aren’t for everyone, but they’re not inherently bad — just riskier. They can offer high income, but come with a real chance of losing money if the issuer defaults. If you’re considering investing in them, it’s crucial to understand the financial health of the company and to assess whether the potential rewards outweigh the risks.

They’re a classic case of "higher risk, higher reward", and should be approached with careful research and caution — especially if you’re not a seasoned investor.