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Junk bond is a bond that is not a part of Lehman Aggregate Bond Index and do not have investment grade. Although these bonds may offer higher returns to attract investors, they have a greater risk of default. Many types of investments like pension funds are prohibited by laws to invest in junk bonds which have lower rated securities. Some junk bonds can also be repackaged into collateralized debt obligation to raise its credit rating.
Not all junk bonds are bad and unworthy of investment. PTRAX is allowed to have up to ten percent of its portfolio in high yield bond. Before investing in a junk bond, investors are recommended to study High-yield bond indices such as CSFB High Yield II Index ( CSHY), the Bear Stearns High Yield Index ( BSIX), Merrill Lynch High Yield Master II, etc…
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