Junk is something which deserves trash sooner or later just because its life is short to consume. Similar are Junk bonds the more you own and do not redeem till longer time higher is the default risk. Junk bonds offer 3-4 % more than government securities. The demand for Junk bonds is in rising economy but the yields are inversely proportional to economic growth but not in case of recession where the yields fall. Consider the case of USA where Junk bonds evolved in 1980 and increased 10 folds as more and more cos issued Junk bonds. However Junk bonds have increased economic growth in growth stage but during recession in 1990-91. Junk bonds turned to Junk bombs where most of the cos defaulted to repay the bond holder (lender).
Junk bond are tradable in India but the markets are small and not popular. But I am worried when the markets will grow. Say a company defaults in Junk bonds so the equity price of that company falls in the exchange where it is traded due to investors sentiments. This will increase the volatility in the markets.
These innovative financial products if not used in effective and efficient manner will hurt the economy. Just need an alert regulated system on this one. Efficient an d effective use would be boon for the nation.
KHP
ecomaniac
No comments:
Post a Comment