Junk Bond.
A definition, in plain English — with the books that teach it.
What it means
Junk bonds — formally called high-yield bonds — are corporate bonds rated below investment grade (below BBB− by S&P or Baa3 by Moody's), reflecting a materially higher risk of default. Issuers include leveraged buyout targets, startups, and financially stressed companies. In exchange for the credit risk, investors receive significantly higher yields than investment-grade or Treasury bonds. High-yield bonds often trade more like equities than bonds — their prices correlate strongly with stock market conditions and economic cycles.
Example
A private equity-backed retailer issues 5-year bonds at a 9.5% yield when investment-grade peers yield 5% and Treasuries yield 4%. The 5.5-percentage-point spread compensates investors for the elevated default probability. During a recession, the bonds might fall to $0.70 on the dollar as default fears spike, pushing the yield above 15%.
