The failure rate in the second quarter jumped to 5.43 percent from 4.82 percent a year earlier. That is a quantum leap, but seems minimal when compared to the projected failure rate of 8.4 percent by this time next year. The default rate on junk bonds has always been high. After all, these are bonds that, by definition, are risky investments. The company has to pay above average interest rates because there is a good chance that they may not be able to pay interest on a timely basis or return principal at maturity.
Junk bonds are an important part of the financial food chain.
They allow companies to raise capital for growth and expansion. Many of the companies that issue these bonds would be rejected by the traditional lending system. And, the majority of the companies that issue junk make good on their obligations. Like any other type of investment, diversification and selection becomes very important when putting your money into junk bonds. Mutual funds are perhaps the easiest and safest way to invest in junk.