Junk bond is a bond with a high degree of default risk, which has been assigned a speculative rating by the ratings agencies.
Applying "Junk Bond" to Securities Exams:
Corporations who have had credit isssues and who have earnings issues will ususally be assigned a lower credit rating by the credit ratings agencies. These lower credit ratings reflect the higher level of default risk associated with the bonds. When an issuer has a higher level of risk investors will demand a higher interest rate to compensate them for taking the additional risk. These high yield bonds are often referred to as junk bonds.