High Current Income

• The most obvious benefit of investing in junk bonds is high current income. If a financially weak corporation has to borrow money, it has to pay more in interest to compensate investors for the added risk.
  
  

Capital Appreciation

• When a bond is issued, its interest payments are fixed in dollars for the life of the bond. At maturity, the bond will be repaid in full at face value. The interest rate at issuance is based on the assigned credit rating and the prevailing interest rates for similar bonds. If the bond is later downgraded to junk, its interest payments remain the same, but the bond price in the secondary market drops to reflect the added risk--the bond starts trading at a discount to its face value. At maturity, the bond will still be repaid at face value (provided it does not default). An investor who buys a junk bond at a discount and holds it to maturity will realize a capital gain--the difference between the price he paid and the full face value he will receive at maturity.
  
  

Less Interest Rate Risk

• Bonds are interest rate sensitive: When interest rates rise, bond prices drop. But many junk bonds are already trading at a substantial discount to their face value and may react less to interest rate changes.
  
  

Better Asset Allocation

• Asset allocation is based on the premise that holding assets with limited correlation may reduce overall portfolio volatility. This means that a portfolio that holds several categories of risky assets, such as small cap stocks, junk bonds and commodities, may actually be less volatile overall as long as the assets move in different directions. As counterintuitive as it may sound, junk bonds may add stability to certain portfolios in certain circumstances.