What Are Junk Bonds? Definition & Examples

What Are Junk Bonds?

By Timothy Green – Updated Aug 8, 2025 at 9:41 PM EST

Key Points

Junk bonds offer high returns due to higher interest rates, compensating for their increased default risk.
Prices of junk bonds reflect economic conditions, rising when the economy improves and falling otherwise.
Investors can buy junk bonds directly or through high-yield bond funds for diversified risk management.

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Wooden tiles spelling out "bonds". — Image Source: Getty Images

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Face Value

Face value is a financial term used to describe the nominal or dollar value of a security.

The price at which a bond trades is influenced by the outlook for the business, average interest rates in the market, and a company's financial results. Bonds of companies perceived as risky tend to trade at discounts to the bonds' face value, while bonds from lower-risk companies trade at premiums to par.

Notably, bond prices are not much influenced by a company's stock price. While stocks represent company ownership, bonds are just loans to corporations. The face value of a bond at redemption plus the interest that it pays is essentially what a bond is worth.

Rising junk bond prices tend to indicate an improving economy. Declining junk bond prices are generally a sign of poor or worsening economic conditions.

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A chart showing the dividend yields of PIMCO bond funds. — Data by YCharts.

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The PIMCO High Yield Fund, which invests in carefully selected junk bonds, pays investors an interest rate that is almost two-thirds higher than the investment-grade bond fund rate. That's a lot of extra income potential -- and plenty of individual junk bonds offer even higher yields than these two funds.

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Interest Rate

An interest rate is the cost of borrowing money or the premium you get for lending money. Learn how interest rates affect the economy.

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Bonds Explained: How They Work and How to Invest in Them

Bonds are often considered a safe investment, but are they right for you?

Your Complete Guide to Corporate Bonds

If the issuing company remains solvent, bonds can be a good, stable investment.

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Are junk bonds a good investment?

Although they pay higher yields, junk bonds also have unique risks that investors should be aware of before making any investment. Here are some of the advantages and disadvantages of investing in junk bonds:

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High-yield bonds can be an excellent choice for investors with an appetite for risk and portfolios that are already diversified. Which specific junk bonds are right for you depends on the length of time you want to invest, how much income you are seeking to earn, and how much risk you are willing to take. When choosing junk bonds, focus on managing risk, not just earning the highest yield.

Also, since bonds can usually only be bought in relatively large increments, you can consider purchasing shares in a high-yield bond index fund or a high-yield bond mutual fund instead. Not only are shares in these types of funds more affordable, but high-yield bond funds invest in large, diversified baskets of junk-rated bonds. Holding the bonds of dozens -- or even hundreds -- of companies lowers the fund's risk by the magic of portfolio diversification.

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About the Author

Tim Green is a contributing Motley Fool technology and consumer goods analyst covering companies in AI, cloud computing, retail, and other market sectors. Before The Motley Fool, Tim was in a doctoral program for computational physics. He holds a bachelor’s degree in physics from Rochester Institute of Technology.

TMFTimGreen

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's and S&P Global. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.

What Are Junk Bonds?

Key Points

Face Value

Interest Rate

Bonds Explained: How They Work and How to Invest in Them

Your Complete Guide to Corporate Bonds

Are junk bonds a good investment?

About the Author

Our Guides

Premium Investing Services

Bonds Explained: How They Work and How to Invest in Them

Your Complete Guide to Corporate Bonds

How do junk bonds work?

How to buy junk bonds

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Are junk bonds a good investment?

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Examples of junk bond companies