Junk bonds are here
What is it? Bonds below investment grade are popularly called junk bonds and carry rates that are 3-5 percentage points higher than those of government bonds.
Why are they risky? Being below investment grade, investors run a high risk of losing their money. These bonds are usually purchased for speculative purposes, as they work on the principle of high risks and high returns.
What’s the experience in other countries? Junk bonds raised growth rates in the US. In the ’70s and ’80s, became a rage on Wall Street and fuelled the 1980s boom in hostile takeovers.
Its most famous purveyors, Michael Milken and Ivan Boesky, were both jailed for various marketrelated crimes and the Hollywood blockbuster Wall Street was based on their lives.
Can this happen in India? Difficult to say. But they are expected to fuel growth for companies that are struggling to raise money. And the intention of allowing junk bonds is to attract more players to the corporate bond market that is struggling to take off.
