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ABC issued 20 yr bonds you bought 2 years ago. Now they're offing junk bonds and...

ABC issued 20 yr bonds you bought 2 years ago. Now they're offing junk bonds and using the proceeds to repurchase stock. Does any of this affect your bonds value? Please show work.

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Answer #2

A Junk Bond is a debt instrument with a credit rating below BBB- rating. The probability of default on these type of bond is very high. since the level of risk on investment in junk bond is high that is required return is also high. after issuance of junk bond, required rate of return on new bond and existing bond increase. if required rate of return on existing bond increase then value of existing bond decrease.

So, value of your investment decrease in term of value after issuance of junk bond.

answered by: anonymous
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