What is a “Junk Bond”?
"A junk bond is, broadly, a bond with a non-negligible risk of default.  (""Bond"" ought to be defined elsewhere, but broadly it's a financial instrument you buy from a company or government, where they promise to pay you back the principal and some interest over time, on a particular schedule.) The name ""junk"" is a bit exaggerated: many of them are issued by respectable and reasonably stable businesses. junk bonds were required to do large leveraged buyouts.  This means: the company issued fairly risky, fairly high-yield debt, to buy out equity holders.  They have to pay a high rate on the debt because the company's now fairly highly geared (ie has a lot of debt relative to its value) and it may have to pay out a large fraction of its earnings as interest. What is a junk bond and how does it differ from a regular bond?  It's only a matter of degree and nomenclature.  A bond that has a credit rating below a particular level (eg S&P BBB-) is called junk, or more politely ""non-investment grade"" or ""speculative"".  It's possible for an existing bond to be reclassified from one side to another, or for a single issuer to have different series some of which are more risky than others.  The higher the perceived risk, the more interest the bond must pay offer in order to attract lenders. Why is there higher risk/chance of default? Well, why would a company be considered at higher risk of failing to repay its debt?  Basically it comes down to doubt about the company's future earnings being sufficient to repay its debt, which could be for example:" From wikipedia: In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors. In terms of your second question, you have the causality backwards.  They are called junk bonds because they have a higher risk of default. "A ""junk bond"" is one that pays a high yield UP FRONT because there is a good chance that it could default. So the higher interest rate is necessary to try to compensate for the default Junk bonds are used in leveraged buyouts (LBOs) because such deals are INHERENTLY risky. ""Normal"" companies may have 20%-30% debt and the rest equity, so that the company will have to lose 70%-80% of its value before the debtholders start losing money on ""normal"" bonds. But in an LBO, the company may have only 10%-20% equity and the rest debt. Meaning that if it loses that small equity cushion, the value of the ""junk"" bonds will be impaired."
"The first thing that it is important to note here is that the examples you have given are not individual bond prices.  This is what is called the ""generic"" bond price data, in effect a idealised bond with the indicated maturity period.  You can see individual bond prices on the UK Debt Management Office website. The meaning of the various attributes (price, yield, coupon) remains the same, but there may be no such bond to trade in the market.  So let's take the example of an actual UK Gilt, say the ""4.25% Treasury Gilt 2019"".  The UK Debt Management Office currently lists this bond as having a maturity date of 07-Mar-2019 and a price of GBP 116.27.  This means that you will pay 116.27 to purchase a bond with a nominal value of GBP 100.00.  Here, the ""nominal price"" is the price that HM Treasury will buy the bond back on the maturity date.   Note that the title of the bond indicates a ""nominal"" yield of 4.25%.  This is called the coupon, so here the coupon is 4.25%.  In other words, the treasury will pay GBP 4.25 annually for each bond with a nominal value of GBP 100.00.  Since you will now be paying a price of GBP 116.27 to purchase this bond in the market today, this means that you will be paying 116.27 to earn the nominal annual interest of 4.25.  This equates to a 3.656% yield, where 3.656% = 4.25/116.27.   It is very important to understand that the yield is not the whole story.  In particular, since the bond has a nominal value of GBP100, this means that as the maturity date approaches the market price of the bond will approach the nominal price of 100. In this case, this means that you will witness a loss of capital over the period that you hold the bond.  If you hold the bond until maturity, then you will lose GBP 16.27 for each nominal GBP100 bond you hold.  When this capital loss is netted off the interest recieved, you get what is called the gross redemption yield.  In this case, the gross redemption yield is given as approximately 0.75% per annum. NB.  The data table you have included clearly has errors in the pricing of the 3 month, 6 month, and 12 month generics." "While you have asked for general principles, I am going to seize onto a specific example you gave in order to illustrate the difficulties here: Argentina. Argentina's bonds are probably not safer than US treasuries. Argentina is presently in the business of seizing foreign oil businesses (Repsol YPF) while championing leftist causes. At the very least this indicates an elevated level of political risk: S&P, which affirmed Argentina's ratings five notches into junk territory at B, said policies such as those enacted since the country's October presidential election could also weaken Argentina's macroeconomic framework and external liquidity... ""Actions of this type continue to shorten the economic planning horizon in the country and contribute to Argentina's deteriorating economic and political links with the international community."" -- ""S&P Lowers Argentina Outlook To Negative"". The Wall Street Journal, 23 April 2012 You're not going to be able to capture that sort of a risk with raw budget numbers. It's hard enough to figure out creditworthiness for a business; for an entire nation it's even harder. That's why credit-rating firms, as faulty as they may be, employ dozens of people to try and figure this sort of thing out. Additionally, there is a currency risk associated with buying bonds denominated in foreign currencies. It doesn't matter much if $nation repays all its bonds if they have so much inflation that the repayment is worth half of what it used to be (nor is it much help if your own nation's currency rises in value while your investment's value is stable elsewhere). Ultimately the value of a bond is ""how much money am I actually going to get back?"" and while operating a budget surplus isn't a bad sign in and of itself, it's hardly the complete picture. A fair accounting of the relative creditworthiness of any two nations needs to unite two massive fields of study: Macroeconomics and Politics. It is possible that the right sort of degree in economics, risk management, or a similar field of study could prepare you to know exactly what sort of research is necessary to make a meaningful analysis. :) Now, if you just want some commentary on which bonds are safe to buy, ask a credit-rating agency -- for example, read Standard and Poor's sovereign ratings - or find a mutual fund which may invest in international bonds at its own discretion and have someone else make the decisions." "First of all, congratulations on saving some money. So many people these days do not even get that far. As far as investments, what is best for you depends heavily on your: Here is a quick summary of types of assets that are likely available to you, and my thoughts on why they may or may not be a good fit for your situation. Cash Equivalents Cash Equivalents are highly liquid, meaning you can get cash for them on fairly short notice. In particular, Money Markets and Certificates of Deposit (CDs) are also considered very safe when issued by a bank, as they are often insured against loss by the government up to a certain amount (this varies quite a lot by country within Europe, see the Wikipedia article here for additional detail. Please note that in the case of a CD, you are usually unable to get access to your money for the length of the investment period, which is usually a short period of time such as 3 months, 6 months, or 1 year. This is a good choice if you may need your money back on short notice, and your main goal is to preserve your principal. However, the returns tend to be very low and often do not keep pace with inflation, meaning that over several years, you may lose ""real"" purchasing power, even if you don't lose nominal value in your account. Special Note on Cash Equivalents If the money you want to invest is also your Emergency Fund, or you do not have an Emergency Fund, I would highly recommend Cash Equivalents. They will provide the highest level of Liquidity along with a short Time Horizon so that you can get your money as needed in the case of unforeseen expenses such as if your car breaks down. Debt Debt investments include government and corporate bonds. They are still considered relatively safe, as the issuer would need to default (usually this means they are in bankruptcy) in order for you not to be paid back. For example, German bonds have been considered safer than Greek bonds recently based on the underlying strength of the government. Unlike Cash Equivalents, these are not guaranteed against loss, which means that if the issuer defaults, you could lose up to 100% of your investment. Bonds have several new features you will need to consider. One is interest rate risk. One reason bonds perform better than cash equivalents is that you are taking on the risk that if interest rates rise, the fixed payments the bond promises will be worth less, and the face value of your bond will fall. While most bonds are still very Liquid, this means that if you need to sell the bond before it matures, you could lose money. As mentioned earlier, some bonds are riskier than others. Given that you are looking for a low-risk investment, you would want to select a bond that is considered ""invesment grade"" rather than a riskier ""junk"" bond. Debt investments are a good choice if you can afford to do without this money for a few years, and you want to balance safety with somewhat better returns than Cash Equivalents. Again though, I would not recommend investing in Debt until you have also built up a separate Emergency Fund. If you do choose to invest in bonds, I recommend that you diversify your risks by investing in a bond fund, rather than in just one company's or government's debt. This will reduce the likelihood that you will experience a catastrophic loss. Ownership Ownership assets includes stocks and other assets such as real estate and precious metals such as gold. While these investments can have high returns, in your situation I would strongly recommend that you not invest in these types of investments, for the following reasons: For these reasons, debt is considered a safer investment than equity for any particular company, government, or the market as a whole. Ownership assets are a good choice for people who have a high Risk Tolerance, long Time Horizon, low Liquidity needs, and will not be bothered by larger potential changes in the value of the investment at any given time. Special Note on Gold I would consider Gold a very risky investment and not a good fit for you at the moment based on what you've shared in your question. Gold is considered ""safe"" in the sense that people believe that if the economy goes into recession, depression, or collapses entirely, gold will continue to be valuable. In a post-apocalyptic world where paper money became worthless, it is still a good bet that gold will always be considered valuable within human society as a store of value. That being said, the price of gold fluctuates almost entirely based on how bad people think things are going to get. Think about the difference between gold and a company like Coca-Cola. Would you like to own 100% of Coca-Cola? Of course, because you know there is a very good chance that people will continue to spend money all over the world on their products. On the other hand, gold itself produces no products, no sales, no profits, and no cash flow. As such, if you buy gold, you are really making a speculative bet that gold will be in higher demand tomorrow than it is today. You are buying an asset (the gold) rather than part of a company's equity or debt that is designed to throw off payments to its investors in the form of bond payments or dividends. So, if people decide next year that things are improving, it is possible that gold could lose value, given that gold prices are at historically high levels. Gold could be a good choice for someone who has a large, well-diversified investment portfolio, and who is looking for a hedge to protect against inflation and other risks that they have taken on via their other investments. I hope that is helpful - best of luck in your choices. Let us know what you decide!" Well keep in mind until the 2007ish housing crash Fannie and Freddie MADE money, they received no help from the federal gov't. The whole idea of the secondary mortgage market was to keep money flowing to home buyers and everyone who bought a home benefited (via rates a few points lower than if banks had to keep all the capital on hand to back all the loans)  Both these institutions worked well for about 40 years, the criminality here was that ratings agency rated these bonds as AAA, when in fact they were junk, that's who failed in their due diligence and really should be held accountable. (as if they were rated junk, the banks would have no one to buy them except at junk bond interest rates, meaning they wouldn't have made these loans to people who couldn't really afford houses.) The rating agencies were *supposed* to be neutral evaluators of the debt, and instead they essentially took what amounts to bribes from the banks to rate them highly. "The gold itself isn't debt, but most people stashed their gold away in a ""bank"" of some sort and got a piece of paper saying something along the lines of (Reddit bank owes you 50 grams of gold) and you would trade this as a form of money." Gundlach shared a chart that showed how investors in European “junk” bonds are willing to accept the same no-default return as they are for U.S. Treasury bonds. In other words, the yield on European “junk” bonds is about the same—between 2 percent and 3 percent—as the yield on U.S. Treasuries, even though the risk profile of the two could not be more different.  Sounds like a strong indicator to me. How might this play out in the US? Because US bonds have had the prior impression of absolute invincibility and safety that has helped the dollar become the world's reserve currency and the United States borrow essentially at will. For the people that care what S&P says, the aura of invincibility is broken and it is conceivable, in SOME universe, for the US to default on its debt. This is of little practical importance on its own, but it's yet another signpost on the road to Chinese or European economic hegemony. "MBS is a fairly general term ""Mortgage Backed Securities"" which simply means that the bond is collateralized with mortgages.  Pass throughs are a type of MBS that is untranched: all bond holders of the deal are receiving the same interest and principal payments, there is no senior or subordinate class of bonds.   Agency passthroughs bond holders receive any principal and interest payments paid by the loans in the pool, minus a slice of the interest payment that pays billing and insurance fees (servicing and guarantee fees, usually a .5% slice of the mortgage interest rate).  On agency product (including Ginnies), if a loan defaults it will be bought out of the pool, with the bondholder receiving all of the expected principal and any interest due on the loan.  Agency deals with different classes of bonds are usually called REMICs.  Passthrough may also be split into  principal-only (PO) and interest-only (IO) pieces.   There is also a huge forward market in soon-to-be-issued passthroughs called the TBA market.  Ginnie Mae has two slightly different programs referred to as Ginnie I and Ginnie II.  Ginnie also has commercial and construction loan financial products.  Freddie and Fannie have the same type of financial products as Ginnie, but there are differences in the sort of loans that Ginnie has vs the other agencies, as well as subtle minor differences between the contract terms of the securities.  Ginnie is also more explicitly guaranteed by the federal government.  You may want to look at:  http://www.ginniemae.gov/index.asp (especially the ""For Investors"" and ""For Issuers"" sections.)  Wikipedia's MBS may be more clear than my description: http://en.wikipedia.org/wiki/Mortgage-backed_security#Types"