Economics Bonds Questions Medium
The main difference between a junk bond and an investment-grade bond lies in their credit ratings and associated risks.
A junk bond, also known as a high-yield bond, is a bond issued by a company or government entity with a lower credit rating. These bonds are considered to have a higher risk of default compared to investment-grade bonds. The lower credit rating indicates that the issuer has a higher probability of not being able to make interest payments or repay the principal amount at maturity. Due to the higher risk, junk bonds typically offer higher yields to compensate investors for taking on this additional risk.
On the other hand, an investment-grade bond is a bond issued by a company or government entity with a higher credit rating. These bonds are considered to have a lower risk of default compared to junk bonds. The higher credit rating indicates that the issuer has a lower probability of defaulting on interest payments or principal repayment. Investment-grade bonds are generally considered safer investments and are often issued by well-established companies or governments. As a result, they typically offer lower yields compared to junk bonds.
In summary, the key difference between a junk bond and an investment-grade bond is the credit rating and associated risk. Junk bonds have lower credit ratings and higher risk of default, while investment-grade bonds have higher credit ratings and lower risk of default.