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Posted on 29 August 2011.
Many investors stay away from the Junk Bond Market because they perceive investing in junk bonds as being inherently risky. As their name implies, junk bonds are bonds issued by companies that are in some state of financial distress and have bonds that are rated by major bond rating agencies below investment grade due to the higher risk of default by the distressed bond issuers. Bonds that trade in the Junk Bond Market carry much higher yields than more highly rated investment grade bonds, due to their higher risk of default. Investors demand higher yields from junk bonds in exchange for assuming a higher risk of default.
While investing in individual junk bonds is definitely more risky than buying highly rated investment grade bonds, there are ways to play the Junk Bond Market that reduce the risk associated with owning junk bonds. There a number of mutual funds and Exchange Traded Funds (ETFs) that invest in the Junk Bond Market and offer attractive dividends that are based on the high yielding junk bonds that they hold. The advantage of buying mutual funds and ETFs that invest in junk bonds versus buying individual junk bonds themselves is that the risk of a bond default and losing your investment principal is greatly reduced, since mutual funds and ETFs invest in numerous junk bonds. Also, junk bond mutual funds and ETFs are managed by professional money managers that seek out the best junk bonds to invest in and are capable of foreseeing default problems and selling bonds that are in danger of default. Finally, junk bond mutual funds and ETFs offer liquid trading markets that make it easy for investors to buy and sell them, whereas individual junk bonds may be thinly traded and difficult to efficiently buy and sell.
Investors who were spooked by the sharp drop in the stock market in 2008 and 2009 are seeking places to invest their money that offer high yield investment returns without the risk of substantial loss of investment capital. Investing in the Junk Bond Market is a good way to for investors to earn decent investment returns without taking excessive risk with their capital.
There are many different junk bond funds that invest in a wide variety of junk bonds with various bond ratings and maturity dates. One of the better known junk bond funds in the Junk Bond Market is the Barclays Capital High Yield Bond (Symbol: JNK). JNK offers an attractive 5.43% annual rate of return, and reduces its risk by investing in dozens of junk bonds issued by various companies.
An investor who wishes to diversify their investments into bonds, but does not want to give up the high rates of return that can be attained in the stock market, should consider junk bond funds. The Junk Bond Market offers exceptional rates of return on investment capital for those willing to invest in below investment grade bonds.
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