A junk bond is a risky, interest-bearing investment that pays a higher rate of return in order to compensate for the greater possibility of default (non-payment).
These investments are called "junk" because some of the companies are on the brink of insolvency or bankruptcy. In the case of structured financing, the bonds may represent a basket of loans that are subordinated to other borrowing, so that they bear a disproportionate risk of default from otherwise ongoing companies. However, the higher yields paid by junk bonds provide compensation for that higher risk, and the investment may become a profitable one, particularly if the economy improves.
Junk bonds have been used to finance hostile takeovers, as in the takeover craze of the 1980s.