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In Junk-bond, prices look frothy again; the author holds that the economic crisis of 2008/2009 saw an increase in the interest rate of high yield bonds. This is because investors wanted to do away with their risk assets. Despite the end of the recession, the junk bond market seems to have rebounded. This is because junk bonds had high returns in 2009 and 2011. The issuance of a high number of junk bonds is being attributed to lower interest rate demanded by investors in order to hold the bonds. The high return of junk bonds is beneficial to banks.
Junk bonds are rated low since they have more risks than investment grade bonds. Many people hold that these bonds deserve no considerations. However, these types of bonds have had a relatively good track since they were popularized in the 1980s. Despite the deterioration in the economic recessions of the early 1990s and the start of the millennium, the bonds were successful in the 2008/2009 economic recession. As such, junk bonds should be considered as a way of investing especially in times of economic crises. Although investors are afraid of placing their money on risky adventures, high yield bonds are worth the risks if their returns are anything to go by.
Relevance to Principles of Finance
A bond is a form of promissory that issued in the long term. It is usually issued by a business or governmental unit. The person issuing the bond gets money in return, but promises to make interest compensations and to pay back the principal on a specified potential date. There are various types of bonds with different features. A junk bond, also known as a high yield bond was born in the late 1980s. Before then, fixed-income investors were generally unwilling to buy risky bonds. However, towards the end of the 1970s, it was discovered that junk bonds yield more than their risk; these convinced institutional investors to purchase risky debts.