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Junk Bonds

The capacity of financial institutions to select the best investment environment allows them to forecast the performance of their capitals. In the aspect of bond qualities, it is always dependent on the financial institution whether it can take up the risks involved in investing with junk bonds. Technically, junk bonds are just ordinary bonds which are being sold and bought in the stock market. It has the same characteristics of coming from a company with a stated principal, maturity date and the interest rate.

However, the main difference of these bonds compared to regular bonds is that they are practically high-risk commodities. These junk bonds mainly depend on the credit capaci...

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...ty of the issuer. In this case, the issuer of the bond will have to provide higher payment rates to the lender since it has no other options to borrow money (Investopedia, 2008). Therefore, this makes junk bonds pose higher risks on the part of the bond purchaser. Basically, junk bonds are bought by individuals and institutions with a lot of investment assets.

This is true since they will have a working amount of funds even if the junk bonds will not perform out very well. They can use the higher interest rate of about 4-6 percent to outweigh the risks involved in investing with junk bonds. In this aspect, a financial institution should only invest in junk bonds as long as it can sustain long term stability over its assets without depending too much on its bonds. The institution should confirm with its financial standing whether a falling junk bond scenario will not affect its entire investment portfolio.

It should only invest a conservative amount where at least a forecast of 4% of earning rate will just break-even the capital invested. Investing in bonds is one good way to increase the market value of an asset. However, it should always be a reminder that the performance of bonds are dependent only on the credit owner of such assets and that this factor should always be considered by the investor.

References

Investopedia. 2008. Junk Bonds: Everything You Need to Know. Investopedia ULC. Retrieved March 31, 2008 from http://www. investopedia. com/articles/02/052202. asp. http://www. investopedia. com/articles/02/052202. asp

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