Junk Bonds

Module 4 Discussions

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.