‘Junk’ bonds, also referred to as high-yield bonds have got this name mainly due to its reputation of being given low rating by large agencies as well as a high rate of default. When you fail to repay the principal and/or suspension amount of interests, it is called ‘default’.
 
But something very interesting happened in the 1980s. Michael Milken studied the financial market and came to the conclusion that the default rates is not as high as previously thought, on certain bond issues. Thus the ‘high-yield’ market came into existence.
 
The high-yield bonds have existed for a long time. Milken along with his associates came up with ways to predict on these bonds with greater accuracy and confidence and made them not ‘junk’ at all. This development was followed by issuance of more such bonds, from which Milken and others made money. This, some argued that was illegal, which brought  about legal suits later.  
 
All this resulted in millions of people making millions of bucks by taking well-calculated risks on high-yield bonds.
 
The key to succeed in high-yield bond markets lies in taking calculated risks. Taking risks blind-folded does not work too well in bond markets as well as stock markets.
 
For those who can invest time and has the inclination to put in that extra effort, research information on the bond market is available aplenty.

The first step of taking that risk is to get a rating from one of the major agencies like S & P, Moody’s or others. The various investment grades are AAA/Aaa, AA/Aa, A/A, BBB/Baa and ‘junk’ bonds are designated BB or below.

Getting a rating from an agency is just the first step to be followed by many. You have to an independent check on the company’s profile, its present financial state and future prospects, before you buy its stocks. Other concern areas are – assessment of changes in the current interest rates, recession and state of unemployment, technological advancements which can make the company’s products or services obsolete, limited liquidity , etc.

A quick internet search can offer plenty of guidance and advice on the personal research which you wish to carry out on a company. You can access good and sound advisors who have a good track record and give you cautious advice before you decide to make that buy.

There are an equal number of success and failure stories from which you can take lessons. For instance in 1991, people who invested in low-rated bonds reaped the highest total returns – an average of 34.5%. the next year saw junk debts taking second place in the high-return race – 18.2% as compared to 22.4% on convertible debt. While convertible debts have many definitions but one of them is the option of purchasing bonds which can later be converted to stocks at the holder’s decision.

The relevance of this example holds true till date. there are some categories where high-yield bonds make up for one-third of the total issues. And the returns can throw challenge at the average return on shares. Of course nothing compares to the high-yield stocks which some people are lucky or talented enough to pick.  
 
The term high yield is relative but anything above 8% is considered good and 15% is outstanding. S & P in comparison offers an average return at 12%, if the investor carries on for many years, or sometimes decades.

The thumb rule for any high risk investment is that it should not be more than 10-20% of the total portfolio. Everything of course depends on the research which confirms the choice and the investor’s ability to take on high risks and  sustainability of any probable loss of capital.