Economics Bonds Questions
The main difference between a junk bond and an investment-grade bond lies in their credit ratings.
A junk bond, also known as a high-yield bond, is issued by a company or government entity with a higher risk of defaulting on its debt obligations. These bonds have lower credit ratings, typically below BBB- by rating agencies such as Standard & Poor's or Moody's. Due to the higher risk, junk bonds offer higher yields to compensate investors for taking on the additional risk.
On the other hand, an investment-grade bond is issued by a company or government entity with a lower risk of defaulting on its debt obligations. These bonds have higher credit ratings, typically BBB- or higher. Investment-grade bonds are considered safer investments as they have a lower risk of default, and therefore, 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, with junk bonds having lower credit ratings and higher risk, while investment-grade bonds have higher credit ratings and lower risk.