Question

Which characteristics of bonds make some bonds more risky than others? Why do you think those characteristics aff ect a bond’s risk? Provide an example of a Junk Bond and an explanation of why it is considered such.

Answer 1

Characteristics which will be making the bonds more risky than others are-

A. Credit rating of these bonds are generally lower in nature.

B. Bond yields are generally higher in nature because of their high risk association

C. Cost of financial distress relating to the company will be higher and the company will be prone to insolvency

D. These will be mostly junk bonds and non investment grade bonds.

E. Bonds which will have a higher duration will be highly exposed to risk than the shorter duration bonds.

Yes, these characteristics are affecting the bond risk because this could be reflected into the bond pricing because the investors will be demanding a higher risk premium for investment into those bonds which are having higher risk.

junk bonds will be considered of those companies which are almost on the verge of liquidation and they have very low chance of revival like the bonds of JCPenney will be junk bonds.