Disadvantages Of Junk Bonds
Junk bond means that you are investing in a company that has a poor rating according to the rating companies. Also, by investing in them you are taking a high risk. However, to make up for their poor rating, the junk bond issuing companies give you a high rate of interest as a return. Also, on the other hand, the rating systems are not always reliable and accurate. They may exaggerate the ratings for some companies. |
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The biggest disadvantage with the junk bonds is that they are highly volatile. In spite of promising higher returns, the company can crash any time. Smart investors always spread their risks by investing a small percentage in high yield bonds. There are some reliable bonds that give a high yield, and there are junk bonds also. When you invest in junk bonds you do not really have an option to minimize your risk and your portfolio will automatically fall under the high risk category. Psychologically this is a bad feeling for any investor as most of them look for safety options for their money.
Junk bonds are not tax exempt as the company lacks the credibility totally. When the rating companies call it a poor company for investment, even tax exempts are not held valid for such investments. On one hand you may be earning a high return to rate of interest, on the other you will still need to pay the taxes at the end of the day. You need to calculate the profit that you will be left with by investing in this type of bond and also compare it to the amount of risk you will be taking.
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