Homework Questions? Ask a Tutor for Answers ASAP
Junk Bond is a risky security as it is issued by those companies who do not have healthy financial position, but still they need money for betterment or survival. As there is tradeoff between risk and return, therefore keeping in view the risk element of bond, the rate of interest is on higher side as compared to other good rated corporate bonds. To give an opportunity to poor companies so they can raise funds to run the operation of the business, a place should be there, the Junk Bond market provides this opportunity to poor companies so they can survive in the business. At the same time the investor are compensated for risk at higher rate of interest, therefore, the market do also provide an opportunity to those investors who want to earn more and who like to take high risk. Thus, the market plays a role of intermediary between the borrower and lender. It also helps the country in economic stability or at least prevents economy from further decline. If there would not be any market like this then the poor companies would be starting to close one by one and would have brought unemployment, lower tax collection, etc. It can be easily concluded that the Junk Bond market should exist.