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The case for junk bonds

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Author Info

  • Eric S. Rosengren

Abstract

An important financial innovation of the 1980s was the emergence of original-issue junk bonds, securities of below investment grade with high initial yields to maturity. Prior to the 1980s, firms that did not qualify as investment-grade borrowers relied almost exclusively on short-term bank loans for debt financing. Now many such enterprises can obtain long-term financing in national credit markets. ; This article shows that junk bonds are a natural extension of the disintermediation occurring in other financial markets. The author argues that regulating junk bonds alone will not prevent highly leveraged transactions. He concludes that further regulation of junk bonds could limit the ability of below-investment-grade firms to raise longterm funds.

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File URL: http://www.bostonfed.org/economic/neer/neer1990/neer390d.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1990)
Issue (Month): May ()
Pages: 40-49

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Handle: RePEc:fip:fedbne:y:1990:i:may:p:40-49

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Keywords: Bonds ; Corporations - Finance;

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Cited by:
  1. Elijah Brewer, III & Bernadette A. Minton & James T. Moser, 1996. "Interest-rate derivatives and bank lending," Working Paper Series, Macroeconomic Issues WP-96-13, Federal Reserve Bank of Chicago.
  2. Elijah Brewer, III & William E. Jackson, III & James T. Moser, 2001. "The value of using interest rate derivatives to manage risk of U.S. banking organizations," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-66.

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