What characterizes a junk bond?

Junk bonds are characterized as high-yield, high-risk bonds that carry ratings below investment grade. This classification is due to their greater likelihood of default compared to investment-grade bonds. The term "junk" reflects the higher risk associated with these bonds, meaning they offer higher interest rates to attract investors who are willing to take on that increased risk for potentially greater returns.

These bonds are often issued by companies with significant financial difficulties or a less stable financial history, which is why they are seen as a risky investment. The higher yields are essentially a compensation for the investor for bearing this additional risk. Investors looking for opportunities to achieve higher returns might be drawn to junk bonds, but they must be prepared for the possibility that they could lose their entire investment if the issuing company defaults.

The other options do not accurately describe junk bonds; they either present characteristics of much safer investment classes or refer to categories that do not align with the nature of junk bonds.