Many of us think of bonds as safe, conservative investment vehicles. But high-yield bonds, also called junk bonds, can be quite the opposite.
Like traditional bonds, high-yield bonds are loans from an investor to a company or a municipality. In exchange for the loan, the bond issuer agrees to pay the investor back with interest. But with high-yield bonds, the interest rate -- and the risk -- are higher because the bond issuers have been identified as poor credit risks.
The term junk bonds became a household phrase in the 1980s when Wall Street trader Michael Milken made a fortune through shady junk bond trades and went to prison for securities fraud [source: McGrath]. Today, many high-yield bond investors try to offset their risks by purchasing the bonds through specialized mutual funds rather than investing all their money with one issuer.