Conflict of Interest in Investment Banking
February 12, 2025
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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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