Junk bonds, also known as high-yield bonds, are bonds rated below investment grade (BB+ or lower) by credit rating agencies. They are issued by companies or entities with higher credit risk, meaning there is a greater chance of default.
Because of the higher risk, junk bonds offer higher interest rates to attract investors. For example, while an investment-grade corporate bond might yield 4%, a junk bond from a riskier company might yield 8-10%.
Junk bonds can be attractive for investors seeking higher returns who are willing to accept the additional risk. They play a significant role in the fixed-income market and are often used by companies going through financial restructuring or startups that don't yet qualify for investment-grade ratings.