Toys "R" Us
That alone isn't cause for despair, but that's not the only problem. Yesterday, we got a new one: Standard & Poor's, which is in the business of rating the credit (i.e., bonds) of corporations, downgraded Toys "R" Us' credit from "BBB-minus" to "BB-plus." Worse, it hinted that further downgrades may be in the offing. The other main credit rater, Moody's
If you've ever wondered what "junk bonds" are, Toys "R" Us bonds are now an example. They're simply bonds of companies with low credit ratings. A company typically gets a low rating because it doesn't inspire investor confidence -- it may be weighed down by massive debt, or face major uncertainty, or even be struggling to survive.
When such companies want or need to borrow money, since they're rated by the agencies as significantly more risky than others, they have to offer high interest rates on their bonds, sometimes in the double-digits. After all, without this added incentive, investors would simply opt for bonds of higher-quality companies.
So junk bond investors are those who seek high returns through the high interest rates paid by shaky companies. They're taking above-average risks (because some of these firms may end up defaulting, unable to pay what they owe) in a quest for above-average performance.
Interestingly, junk bonds aren't such an uncommon thing. According to one expert, "The bonds of 95% of U.S. companies with revenues over $35 million -- and of all companies below that amount -- are rated noninvestment grade or junk."
Think twice -- or thrice -- before investing in junk bonds. Remember that outstanding returns can also be had by investing in healthy, growing companies. (Consider checking out our Fool Stock Newsletters for some promising stocks. In one, we even recommended the credit rater Moody's, which has advanced some 45% in a year and a half or so.)