Junk Bonds
shasha4
JunkBondsResponses.docxQuestion
If you have poor credit due to being delinquent on credit card debt or other issues, chances are the bank is going to charge you a higher interest rate on a personal loan, or it might not give you a loan at all. Corporations face the same problems. If a company takes on too much debt or is otherwise considered to be a credit risk, then it also gets low credit ratings. In this case, if it wants to take on more debt it needs to issue what is known as “junk bonds,” or as corporations prefer to call them, “high-yield bonds.”
Whatever you call these types of bonds, their key feature is that they pay higher interest than bonds from a corporation that has a high credit rating. If you have a 401(k) or other retirement investment fund, chances are you have the option to make a portion of your investment in these higher risk/higher return bonds.
Do some research on junk bonds. What kind of controversies do you see with them? Do you think they are a solid investment for your retirement, perhaps no riskier than most investments? Or do they deserve the derogatory term “junk”? Share the links to the articles you find with your classmates, and discuss your opinions as to whether you think the higher interest rate justifies the increased risk.
Your Answer
They are highly yielding profile bonds. They are known like that since they are naturally non-investment and they are of high risk. They have a high profile high risk and its yields are very high. They are fixed income which are rated lower by the SP at the BB or below as Ba. This is according to rates that were given by Moody in the profile of investment. (Plath, 1991)
The junk bonds cannot be trusted to be solid investments. This is because they have controversies and they are of high risk. They can earn oneself higher yields. On the other hand it has a possibility of risk of defaulting and hence they deserve to be disparaging as they are often associated. This is because the needs of retirement have to be having best returns as the final status of investments of a person and cannot be subjected to adverse the credit situations or have a possibility of default. Anybody who is wise in making investment decisions ought to acquire the bonds which have ratings that lie between the investment grades. (Plath, 1991)
References
Plath, D., (1991).Financing Takeovers: Junk Bonds and Leverage Buyouts. Managerial Finance, 17(1),19-24.
Student 1
Contains unread posts
Robert Allen posted Jan 17, 2018 7:18 AM
Solid investment choices are what makes or breaks you in retirement right? You hope that you make the right risk choices and that it pays off within enough time to retire and not require you to eat tuna everyday or live in a cardboard box for your retirement home. Each person has to take into account how much "risk" they want to take on when they are investing their funds for retirement. If you have a longer amount of time to retirement, then you could afford to be a little bit more riskier in your choices earlier in your investments and switch to a more conservative stance later on...but if you are close to retirement, you want to maintain a more stable investment choice and make sure your risks are generally lower. In this case, junk bonds pay a higher interest rate - but they are also riskier. There is a chance that they will default and you would be out your funds - which is probably why the bank wouldn't provide them with a loan to begin with. Not all companies that have the "less than desired" credit rating will default - but it becomes a matter of choice on whether you want to take a chance and invest in them with the high-yield bonds or choose something else a little more stable. With higher risk comes higher reward - but you have to look at the big picture and make the best decision overall. It's almost like going to a casino or betting...you only need to bet or wager money that you would be ok with losing completely. If you make money back on it above your initial amount...that's just gravy - but you have to be prepared to not get that money back, and have a safety net to fall on it that does happen.
I personally would not like to invest in the junk bond option - I would prefer more stable stocks/bonds...and I'm ok with not making go-jillions of dollars on that single investment. To me it is the overall picture that I need to succeed in and the overall portfolio needs to be performing at a level to satisfy the retirement goals.
https://money.usnews.com/investing/bonds/articles/2017-09-28/why-investors-seek-junk-bonds
Student 2
Contains unread posts
Randy Boucher posted Jan 16, 2018 3:29 PM
Rarely will an investor find a perfect investment. A bank account ensures money is not lost, however, most bank accounts do not keep up with inflation, so money is lost annually. Some would consider a savings account a bad investment. When putting investing this way junk bonds may not look as bad. Whenever an investor is considering junk bonds or any other investment for that matter research must be thorough. There are safer investments in the arena of junk bonds just as there are there are junk bonds that are a little riskier than others.
When a person is investing for retirement junk bonds are not necessarily a bad idea. Although, junk bonds should not be the only investment in portfolio. Some junk bonds are probably just that junk, while others are companies trying to fight their way out of a hole. If the economy is gaining strength junk bonds are a little safer (Morningstar, n.d.). Just as, junk bonds in a striving field have a good chance of being paid since the company has a higher likelihood of being successful (Morningstar, n.d.). There are other things to look for when investing in junk. For instance, understanding the firm's debt to equity ratio and debt to asset ratio will help decide if the junk bond is a safe bet (Morningstar, n.d.). If the debt to equity or asset ratio is in good standing often the investor can recoup some money even if the full maturity is not paid, in the event the company goes into bankruptcy. Another area is becoming familiar with the organizations financial strategy (Morningstar, n.d.). If the organization has well managed it came prevail over a poor credit rating. Even after conducting all this research there is still more risk than investment-grade bonds, which is why junk bonds are high-yield. If the investor is willing to take the risk, then there should be a reward.
Reference
Morningstar. (n.d.). Junk Bond Creditworthiness. Retrieved from http://news.morningstar.com/classroom2/course.asp?docId=5401&page=3&CN=sample
Junk bonds are risky investments because they offer much higher yields than bonds with high credit ratings. Investors request higher yields as compensation for the involved risk (Bodie, 2013). There is a wide range of controversies surrounding the junk investment bonds. On the one hand, they avoid equity dilution that can emerge from the provision of new common shares, as well as, provide less costly sources of funds on an after-tax basis than equity. Compared to commercial bank loans, high yield bonds require less stringent covenants on the provider (Bodie, 2013). On the other hand, there is a higher level of fixed charges that may arise from the issuance of high yield debt. This enhances credit risk.
Bodie, Z. (2013). Investments. New York, NY: McGraw-Hill.
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