One is said to hedge a risk when the action taken to reduce one’s exposure to a loss also causes one to give up of the possibility of a gain. For example, farmers who sell their future crops before the harvest at a fixed price to eliminate the risk of a low price at harvest time also give up the possibility of profiting from high prices at harvest time. So, they are hedging their exposure to the price risk of their crops.
There is a fundamental difference between insuring and hedging. When you hedge, you eliminate the risk of loss by giving up the potential for gain. When you insure, you pay a premium to eliminate the risk of loss and retain the potential for gain.
Junk bonds, also known as high-yield bonds, are nothing more than speculative-grade (low-rated or unrated) bonds. Before 1977, almost all junk bonds were "fallen angels, " that is, bonds issued by firms that originally had investment-grade ratings but that had since been downgraded. In 1977, however, firms began to issue "original-issue junk."
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