Part I: Junk Bonds
Suppose you won the lottery or inherited a small fortune (e.g., $200,000) and have decided to invest money in the junk bonds (low grade bonds). When you purchase a bond that has a low grade by bond rating agencies such as Standard and Poors or Moody's, you are not necessarily making a bad investment. Some investors say that the higher returns that you get from these junk bonds compensates for the higher risk of default or bankruptcy.
Are "junk bonds" (high yield bonds) an overlooking and undervalued investment, or a foolish and risky investment? Please explain your reasoning.
As described above junk bonds are risky and you may end up losing investment. Therefore you should use investment strategies utilizing fixed income securities to diversify risk.
What other fixed income securities would you buy to diversify risk? Why? Please explain your reasoning.
In this part, you will probably want to think about, among other things, points such as:
- Risk and return related to junk bonds
- Types of fixed income securities (e.g., bonds, T-bills, etc.)
- Key factors in analyzing bond investment risk
Part II: International Investments
India is emerging as one of the world's most rapidly developing economic powerhouses. India's stock market is the eighth largest in the world. There are over 7,000 companies listed on the Indian stock exchange and it is considered as one of the most liquid stock markets in the world.
Do you think an investment in the Indian stock market and the India debt securities is a good long-term investment?
Please explain the reasoning using concepts from the Background Information.
In this part, please think about, among other things, the points such as:
- Benefits of stock investment in India,
- Risks of stock investment in India
- Benefits of investment in the Indian debt securities,
- Risks of investment in the Indian debt securities, etc.