What It Means
A junk bond is a bond rated below investment grade (below BBB- by major rating agencies), offering a higher interest rate to compensate investors for a meaningfully higher risk that the issuer defaults on payments.
How It Works
Credit rating agencies like CRISIL, ICRA, and CARE assess a company's ability to repay its debt and assign a rating; anything rated BBB- or higher is "investment grade," and anything below that is speculative-grade, commonly called junk. Companies with weaker balance sheets or shakier cash flows issue junk bonds because it's the only way they can raise debt at all — investors demand a much higher coupon to accept the added default risk. The higher yield is the compensation, not a free lunch: junk bonds can lose a large chunk of their value quickly if the issuer's finances worsen or the broader credit market turns risk-averse.