junk bond

junk bond, Bond paying a high yield but also presenting greater risk than comparable securities. Junk bonds can be identified through the lower grades assigned by rating services (e.g., BBB instead of AAA for the highest quality bonds). Because the possibility of default is great, junk bonds are usually considered too risky for investment by the large institutional investors (savings and loan associations, pension funds, insurance companies, and mutual funds) that provide U.S. corporations with much of their investment capital. Junk bonds are often issued by smaller, newer companies.