What is a junk bond and how does an investor profit from the purchase of a...

What is a junk bond and how does an investor profit from the purchase of a junk bond?

Explain with examples.

Expert Solution

Junk bond is a bond which is issued by low credit rating companies (low credit rating means companies whose credit rating is like BB,B,CCC,CC,C and D).

Generally no any investors want to invest in these companies due to it's low credit rating therefore to attract the investors companies offer higher interest rate on their bonds, and potential/intelligent investors able to earn higher profit by investing in these companies.For investing in these companies generally it's require more analytics and specialized knowledge about credit.

For example ABC a company whose credit rating is D (Rated by Moody's) so in that case no one would like to invest in this company therefore company will pay a higher interest rate on their bond (higher than Market) then most of investors will invest in this company to earn a higher profit.

I hope this clear your doubt.

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jeff jeffy answered 3 weeks ago

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