Question
What are the advantages of junk bonds?
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4th Dec 2009 by Michael Haltman
The advantages of junk bonds for investors are really only one, and that is that they offer an interest rate that is typically much higher than treasury bonds. In the world of "there is no free lunch", for all of this extra reward the investor will be taking on a much higher degree of default risk. Depending on the nature of the company and the degree of the default risk will determine how much higher the bond will trade over treasury yields.
There are corporate junk bonds, municipal junk bonds and even junk bonds issued by foreign entities. This class of investing is tailor made for a mutual fund, because unless you can achieve diversity one default could wipe out the investment. By investing in a portfolio of bonds, even if one or two were to default, the overall return would still be good.
The advantages of junk bonds for investors are really only one, and that is that they offer an interest rate that is typically much higher than treasury bonds. In the world of "there is no free lunch", for all of this extra reward the investor will be taking on a much higher degree of default risk. Depending on the nature of the company and the degree of the default risk will determine how much higher the bond will trade over treasury yields.
There are corporate junk bonds, municipal junk bonds and even junk bonds issued by foreign entities. This class of investing is tailor made for a mutual fund, because unless you can achieve diversity one default could wipe out the investment. By investing in a portfolio of bonds, even if one or two were to default, the overall return would still be good.
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20th Nov 2009 by Mark P. Cussen, CFP, CMFC
Junk bonds pay higher rates of interest than treasury bonds or municipal bonds, sometimes by as much as two percent. These bonds are considerered "junk" because their financial ratings fall below investment grade. In return for a higher level of risk, the issuers of these bonds therefore pay a higher rate of interest.
Junk bonds pay higher rates of interest than treasury bonds or municipal bonds, sometimes by as much as two percent. These bonds are considerered "junk" because their financial ratings fall below investment grade. In return for a higher level of risk, the issuers of these bonds therefore pay a higher rate of interest.
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19th Nov 2009 In Bonds
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