Date:02/11/2009 URL: http://www.thehindubusinessline.com/bline/mentor/2009/11/02/stories/2009110250210702.htm

Back Junk bonds

What are junk bonds?

Padmapriya Ramprasad, Chennai

They are non-investment grade and, hence, highly risky. Hedge funds and others with ravenous appetite for high risks and returns fall for them. Risk-averse investors shun them. In the sub-prime crisis that unfolded in the US last year, one saw the bonds emanating out of mortgage loans through the securitisation process turning into junk bonds. When companies with poor credit ratings issue bonds, they have necessarily got to offer higher rates of interest to attract investor interest. These are called junk bonds. Sometimes bonds are investment grade to start with but in course of time, the company’s financials turn sour and the market morphs them into junk category by sending its prices crashing down so as to give a higher yield warranted by the risk perception.

S. MURLIDHARAN