Junk Bonds
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.
Junk Bonds
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Junk Bonds
There are several controversies surrounding junk bonds. One of the concerns leading to these controversies is the higher default risk. These bonds are usually offered by companies with low credit ratings. Therefore, the chances of the company defaulting when are significantly higher (Fridson, 2023). The other main source of controversy concerning these bonds is their significantly higher volatility. Compared to other bonds, such as government bonds, junk bonds are highly responsive to market and economic conditions. For instance, bonds can become highly volatile when there is economic turmoil. In addition, the bonds are likely to be substantially affected by an increase in interest rates (Illan, 2021). The other cause of controversy surrounding these bonds comes from the high likelihood of manipulation. Some investors argue that banks and financial institutions may interfere with junk bond prices. The manipulation by financial institutions may lead to inflated prices. Consequently, junk bonds are not very attractive to investors.
After a careful analysis of junk bonds, they are not a solid investment for retirement. There are several reasons for arriving at this decision. First, although junk bonds may have higher returns, the risk of losing money is also high. At retirement, I would like to invest in financial instruments that are relatively stable. Stability offers peace of mind since the likelihood of default is significantly low. Secondly, the bonds are highly volatile and responsive to market conditions. Considering these factors, I would not consider junk bonds an excellent investment for retirement. Despite these two factors, I would consider investing in junk bonds under the following special circumstances.
First, if a reputabl...