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The case for junk bonds

Author

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  • 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.

Suggested Citation

  • Eric S. Rosengren, 1990. "The case for junk bonds," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 40-49.
  • Handle: RePEc:fip:fedbne:y:1990:i:may:p:40-49
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    File URL: http://www.bostonfed.org/economic/neer/neer1990/neer390d.pdf
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    References listed on IDEAS

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    1. Goldin, Claudia, 1989. "Life-Cycle Labor-Force Participation of Married Women: Historical Evidence and Implications," Journal of Labor Economics, University of Chicago Press, vol. 7(1), pages 20-47, January.
    2. Duran Bell, 1974. "Why Participation Rates of Black and White Wives Differ," Journal of Human Resources, University of Wisconsin Press, vol. 9(4), pages 465-479.
    3. Cain, Glen G & Dooley, Martin D, 1976. "Estimation of a Model of Labor Supply, Fertility, and Wages of Married Women," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 179-199, August.
    4. Ben-Porath, Yoram, 1973. "Labor-Force Participation Rates and the Supply of Labor," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 697-704, May-June.
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    Cited by:

    1. Brewer III, Elijah & Minton, Bernadette A. & Moser, James T., 2000. "Interest-rate derivatives and bank lending," Journal of Banking & Finance, Elsevier, vol. 24(3), pages 353-379, March.
    2. Elijah Brewer & William E. Jackson & 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, pages 49-66.

    More about this item

    Keywords

    Bonds ; Corporations - Finance;

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