Junk Bonds – Not Exactly Bonds That Are Meant for the Junkyard
When you hear the words “junk bonds,” you probably get the mental picture of a junkyard full of bonds that are pretty much worthless. This, however, could not be further from the truth. Junk bonds are essentially bonds that are financed to companies that pay out high interest to the issuer. The reason these pay out high interest is because the companies have no other choice but to get these high-interest bonds because of their less than stellar credit rating. Who knew that credit ratings also affected companies and not just people? It is definitely food for thought.
Of course, with poor credit ratings comes a lot of risk in loaning the companies any amount of money. People who deal in junk bonds are, in a way, playing Russian roulette with their money. There is a chance that they will see a return on their investment, but there is also a good chance that they will never see all of their initial investment again. Even if the company has to file bankruptcy and liquid all of its assets, the person holding the junk bond could still not get back everything that is owed to them. For that very reason, it is important to know exactly what you are getting into before getting involved in this type of investment trade.
The main benefit to dealing with junk bonds is that it allows you to have a diversified investment portfolio. It is important to have a diversified investment portfolio because you do not want all of your eggs, or money, in one basket so to speak. However, you need to keep the risks of these junk bonds in the forefront of your mind. Do not just buy every single one that you can get your hands on. This type of investment requires more research and analysis than other types of investment – even more than simply buying stocks on the stock exchange.
As long as you keep in mind all of the risks involved with junk bonds and you do all of your research, you should be fine when it comes to getting these types of investments. Never go into any investment with your eyes closed, but this is especially true for junk bonds. The more you know about a company you thinking about investing in – no matter how you plan to make that investment – the better off you will be in the long run.