Our word of the day is a “Junk Bond” A junk bond is exactly the same as a regular

bond. Junk bonds are an IOU from a corporation or organization or country that states the

amount it will pay you back called the principal, the date it will pay you back known as the

maturity date and the interest it will pay you on the borrowed money. Junk bonds differ

because of their issuers' credit quality. All bonds are characterized according to this

credit quality and therefore fall into one of two bond categories, investment grade and

junk. These are the bonds that pay high yield to

bondholders because the borrowers don't have any other option. Their credit ratings are

less than pristine, making it difficult for them to acquire capital at an inexpensive

cost. Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'Ba' or

lower by Moody's. Junk bonds are risky investments, but have

speculative appeal because they offer much higher yields than safer bonds. Companies

that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these

higher yields as compensation for the risk of investing in them. A junk bond issued from

a company that manages to turn its performance around for the better and has its credit rating

upgraded will generally have a substantial price appreciation.