The National Directory of Certified Public Accountants

Ask A CPA - Investments & Financial Planning

What Is A Junk Bond Fund And Why Might It Be A Worthy Investment ?

Junk bonds are high yield corporate bonds. Some corporations, often new companies, do not have established credit history and a proven track record of consistent profits available to pay off loan principal and interest. As a result, when raising capital through bond offerings, the companies must pay a higher rate of interest to compensate the investors for the additional risks (e.g. default, late payment, inadequate collateral, etc.). Mutual funds that specialize in junk bonds can be suitable investments for investors seeking high income and are able to tolerate the associated risks. Often the higher interest rate earnings more than offset the portion of defaulted loans. However, seek out mutual funds that are the best performers and the least risky. Most investors should avoid junk bonds of issuers who are highly leveraged.

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