Which type of bond is known for high returns but also carries a high risk of default?

Junk bonds, also known as high-yield bonds, are characterized by their higher potential returns combined with a significantly higher risk of default. These bonds are rated below investment grade by credit rating agencies, indicating that they are considered more speculative investments. Investors are rewarded with higher yields as compensation for taking on the increased risk of borrowing default.

The defining feature of junk bonds is that they are issued by companies or entities that have poor credit ratings or are more financially unstable. This elevated risk is what attracts investors seeking higher returns; however, it comes with the understanding that there is a greater chance that the issuer may be unable to meet its debt obligations.

Other types of bonds, such as investment grade bonds, municipal bonds, and corporate bonds, tend to carry lower yields due to their perceived stability and lower risk of default. Investment-grade bonds are considered safe investments, while municipal bonds often come with tax advantages and typically exhibit lower risk. Corporate bonds can vary in risk based on the issuing company’s creditworthiness but do not generally reach the same level of risk associated with junk bonds.