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10 pages in length. To invest or not to invest: that is the never-ending question when dealing with junk bonds. The lure of high-interest investments can cloud some people's realization of just how risky this type of bond truly is; choosing a junk bond for no other reason than its potential return is oftentimes as good as throwing one's money into the street. Analysts say that junk bonds are meant only for the experienced investor, leaving the rest to dabble in more secure ventures. Bibliography lists 13 sources.
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File: LM1_TLCJunkB.rtf
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risky this type of bond truly is; choosing a junk bond for no other reason than its potential return is oftentimes as good as throwing ones money into the street.
Analysts say that junk bonds are meant only for the experienced investor, leaving the rest to dabble in more secure ventures. "Yes, there is a premium from junk
bonds, but over the long haul it is not large enough to justify the extra risk. Further, junk has a high correlation with small stocks, so it offers little diversification
value. But high-yield is a remarkable asset class and worth examining, particularly regarding its default rates and expected returns" (Bernstein, 2001). II. UNDERSTANDING JUNK BONDS Junk bonds represent
another term for an I.O.U. where a borrower "pays a certain interest rate for a fixed period of years at the end of which it pays back the full amount
it borrowed" (Anonymous, 2001). Classified as a particular category of bonds, junk bonds yield higher interest rates as a means by which to counterbalance the higher risk assumed by
the investor. At issue is loaning funds to a company that might already have a downward track record and a distinct possibility for failure. The primary reason junk
bonds even exist is to provide economic support for companies "lacking an established earnings history or having questionable credit history" (Anonymous, 2001). The economic fallout of 911s aftermath, however,
have made junk bonds an even greater risk than they ever were, with a whole cluster of otherwise solvent companies coming up ruined. Rating agencies are an important aspect of
junk bonds, in that they provide potential investors with pertinent information pertaining to a given companys financial analysis, as well as its ability to repay debt. Agencies like Standard
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