So how do junk bonds work? Three ratings agencies assign grades to bonds, with AAA or Aaa being the highest, also known as prime. When an investment falls below BBB- (Standard & Poors, Fitch) or Baa3 (Moody's), it becomes junk as opposed to investment grade. Yet even within junk status, there are four risk tiers before a company hits partial or full default.
"High-yield bonds are a source of debt financing from public corporations that are assigned 'below investment grade' ratings from credit rating agencies," says Loren Asmus III, vice president, investment research at Canterbury Consulting and based in Newport Beach, California. "Investors are assuming more credit risk but to achieve potentially higher returns."
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