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New Issue Junk Bond Market and Capital Structure Choice

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The development of the new issue junk bond market had important implications for capital structure choice. The existence of a viable junk bond market means that firms can comfortably maintain higher degrees of leverage than they could prior to the development of this market. Do you agree or disagree? Justify your answer.

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The solution explains concepts of leverage and debt equity in 274 words in order to answer this question on the appearance of a viable junk bond market.

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I do not agree that a company could comfortably maintain higher degrees of leverage than they could prior to the development of the markets. Normally, when a company incurs a debt it agrees to pay the normal market rate of interest. It does not pay a high rate of interest that is paid on a junk bond. In addition, a junk bond is one that is a non-investment grade bond. Why would the bond be rated non-investment grade bond? The reason in ...

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