Conflict of Interest in Investment Banking
February 12, 2025
STRIP is an acronym that is commonly used to denote Separate Trading of Registered Interest and Principal of securities. This is a complex-sounding term however, in reality, the meaning is quite simple. It is important to understand that when we buy a bond that pays regular coupon payments, we are actually buying the right to […]
In the previous articles, we have already established that the financial system of any country is the key to its economic prosperity. It is for this reason that these financial systems need to be appropriately maintained. The government is the party that is most suited to this maintenance of financial systems. However, too much government […]
The Eurobond market is one of the largest debt markets in the world. It comprises a large portion of the debt which is issued by multinational companies as well as governments. It is therefore important for any student of fixed income securities to be aware of what Eurobonds are. The fact that these bonds are […]
In accounting and in finance, conservatism is generally considered to be a positive quality. However, studies in behavioral finance have shown that this may not be the case. This is because conservatism bias is one of the most profound biases which impact the investment decisions of an average investor. In this article, we will understand […]
America has been the hub of financial and entrepreneurial activity ever since the end of World War 2. However, over the past few years, the number of corporations that are using America as their base has been steadily declining. This is because of the unfavorable tax policies in America. America is the only country in […]
Investment bankers help their clients raise money by selling equity as well as bond securities on the securities markets. Investors know that equity securities are risky by their very design. However, when investors think about debt, they often think about secure investments, which are almost certain to pay a fixed rate of return. Debt is usually secured with collateral, and hence it is considered to be investment grade. However, there are certain types of debt, which are not considered to be investment grade. In investment banking parlance, these types of bonds are called “junk bonds.” In this article, we will explain what “junk bonds” are and how the investment banking community has turned these types of bonds into major sources of revenue.
There are credit rating agencies that study the investment profile of various bonds issued. Before the bonds are issued, it is compulsory for credit rating agencies to grade these bonds so that investors are aware of their inherent riskiness. Rating agencies classify bonds into three categories.
There are many investors who have made a lot of money investing in junk bonds. This is because junk bonds provide yields that are much higher as compared to regular bonds.
The term junk bonds can be somewhat misleading. It makes one believe that the bonds are worthless. This is not the truth. There are some facts about junk bonds that debunk this myth.
Investment bankers are actively involved in the issuing of junk bonds. Over the years, issues and sales of junk bonds have accounted for a significant portion of the income generated by investment bankers. The reasons for the same are as follows:
The bottom line is that despite their inherent riskiness and speculative nature, junk bonds are major sources of revenue for investment banks all over the world.
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