Question

Certain bonds are classified as ‘Junk’ bonds – this classification is based on what kind of assessment?

Why might investors want to buy junk bonds?

Answer 1

They have been rated as not investment grade by Standard & Poor's or Moody's because the company that issues them is not fiscally sound. These bonds have a higher risk of default or other adverse credit events. Based on assessment of leverage, debt serviceability, cash flows etc. these bonds have been called so.

Investors would buy Junk bonds because they offer higher yields compared to most other fixed-income debt securities. They also have potential of significant price increase in case company's financial situation improves.