Question

What kind of controversies do you see in Junk Bond? Do you think they are a solid investment for your retirement, perhaps no riskier than most investments? Or do they deserve the derogatory term “junk”? Share the links to the articles you find, and discuss your opinions as to whether you think the higher interest rate justifies the increased risk.

Answer 1

Controversies

The foremost controversy is that Junk bonds are issued by financially unsound corporates or companies-promising high returns to the investor,in order to compensate the risks involved.

Because of the high level of risk, these bonds are not given "investment grade" status, both by S&P & Moody's, even though they yield more % returns, when compared to other corporate bonds.

Retirement option or not

When the economy is good, the average investor ,is willing to take risk & that results in more& more buying of junk bonds, without much of the fear factor. Eventually the companies pick up & their bonds may be upgraded to even investment grade by the above rating agencies.In such situations, these are considered to be solid investment durong retirement, earning good dollar income.

When the downside happens in the economy-ie. When there is a spree of junk bonds being sold out by the holders,retirement investors lose out on their regular income, with interest defaults by the companies-- due to negative economic trend.

So, in effect, the retirement investor would do well to invest in these bonds at times of economic up-turn & to rely on mutual funds during times of decline ,in which case, the responsibility will lie on the better-informed fund -manager--- who has the industry feel.

High interest rates of these bonds

In the first place, higher interests are offerred to entice & compensate the buyer for the risks & uncertainties involved---meaning there is heavy uncertainty regarding the stability of the company ,ane consequently to the safety of the funds invested as well as assurance of regular income to the investor.

So, this carrot of higher interest rates always carry a heavy dose of uncertainty, which is bound to make the investor restless & always uneasy.

Links referred:

1.https://www.thebalance.com/what-are-junk-bonds-pros-cons-ratings-3305606

2.https://www.nasdaq.com/article/the-best-and-worst-junk-bond-funds-paying-up-to-102-cm846211

3.https://www.investopedia.com/terms/i/interestraterisk.asp