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Thinking about investing in Junk Bonds? Even if you are not, you could still benefit from knowing what junk bonds are. It is important to have a vast knowledge of all types of different investment vehicles. Even the riskier ones.
Junk bonds are perceived to be riskier than other types of debt, they typically trade at higher yields—that is, higher rates of return—than investment-grade bonds. Junk bonds are typically issued by a company seeking to raise capital quickly in order to finance a takeover. Junk bond have a credit rating of BB or lower. Companies whose bonds are rated as ‘investment grade’ have a lower chance of defaulting on their debt than those rated as ‘non-investment grade’. Generally, these bonds are issued by long-established companies with strong balance sheets. Bonds rated BBB or above are known as Investment Grade Bonds.
Bond investors of all stripes are piling into junk bonds – including bond, stock investors, and retail investors. Bond investors are investing because they are avoiding the low yields of U.S. Treasury debt while stock investors are investing because they are seeking protection from swings in the market. Neither U.S. Treasury bonds nor investment-grade bonds are expected to deliver meaningful returns this year, fund managers say.
Junk Bond Yields
The yield on junk bonds is historically between 4-6% above Treasuries. If you notice the yield spread shrinking below 4%, then it probably isn’t the best time to invest in junk bonds. High-yield spreads are used by investors and market analysts to evaluate the overall credit markets.
Higher spreads indicate a higher default risk in junk bonds and can be a reflection of the overall corporate economy (and therefore credit quality) and/or a broader weakening of macroeconomic conditions. The higher current yields of junk bonds reflect their greater risk of default to the investor than investment-grade bonds or in this case U.S. Treasuries.
Junk bonds occupy a middle space between stocks and investment-grade corporate bonds. They are riskier than invest-grade corporate bonds but less risky than stocks.
They may not be the right fit for most investors, but if you are a little risky then you might want to venture if this investment vehicle is the right fit for you. Personally, your typical millennial investor would not dabble with junk bonds. They would likely have the bulk of their finances tied up in investment apps or their employer-sponsored retirement account and contributing to an IRA.
I personally, would suggest going this route if you haven’t already. If you are looking for a safer bet check out your options below.
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Webull: This is a free investing app for your phone. I really mean free all around – free to join and they don’t charge any fees to buy or sell stock. You can get a share of stock like Apple, Ford, or Sprint for free when you join through this link.
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Acorns: CNBC calls it “the new millennial investing strategy.” Once you connect the app to a debit or credit card, it rounds up your purchases to the nearest dollar and funnels your digital change into an investment account. Sign up to try it risk-free with a $5 sign up bonus.
Once you get the process automated, Acorns investments make your digital change work for you. I downloaded it and within a year I had $1394.25 in my account.
Interested in investing your own spare change? Check out Acorns for the details.
Remember, you’ll get a $5 bonus when you sign up and make your first investment!
The sooner you start investing, the sooner your money can start to grow toward your goals. These are two of most easy and best money making apps that can help you earn real passive income over time.
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