Question

The importance of knowing the terms of bond issues, especially those relating to redemption, cannot be overemphasized. Yet there have appeared numerous instances of investors, professional and others, who acknowledge that they don’t read the documentation. For example, in an article published in the New York Times, the following statements were attributed to some stockbrokers: “But brokers in the field say they often don’t spend much time reading these [official] statements,” “I can be honest and say I never look at the prospectus. . . . Generally, you don’t have time to do that,” and “There are some clients who really don’t know what they buy. . . . They just say, ‘That’s a good interest rate.’

Answer 1

Yes, The given statement reflects the problem which is there, associated with bondholders because bondholders are only looking for receipts of higher interest and they do not look for the quality of the bonds.

Bondholders are generally looking for higher rate of interest on the bonds so that they can maximize their uniform earning periodically so they do not look for what are the redemption risk related to those bonds.

These redemption risk are very high in case of bad quality bonds who are not having a good quality and generally these low quality bonds are only offering a higher rate of interest because of their lower credit rating to attract a large number of investor but the repayment ability of these companies are lower so they will be trying to adjust it with a higher interest rate and they are going to trap a lot of investors because the investors are not aware about the consequences of subscribing to a low grade bonds so they are just looking for earning a higher rate of interest and it may lead to trap at many investors