What term describes bonds that have a lower credit rating and higher default risk?

The correct term for bonds that have a lower credit rating and exhibit a higher risk of default is "junk bonds." Junk bonds, also known as high-yield bonds, are issued by companies or entities with poor credit ratings, indicating that they are more likely to default on interest payments or principal repayment compared to higher-rated bonds. Because of their increased risk, junk bonds typically offer higher yields, compensating investors for taking on that additional risk.

Understanding the nature of junk bonds can help investors make informed decisions regarding their portfolios. In contrast, investment-grade bonds and high-grade bonds are associated with lower risks and a higher likelihood of repayment, while government bonds typically carry low risk due to the backing of the government. Hence, junk bonds represent a distinct category characterized by their higher risk and potential for greater returns.