Define junk bonds and hybrid funds?



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Meaning of junk bonds and hybrid funds?

1 Answer(s)


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A junk bond is a fixed-income security that is rated below investment grade by one or more of the major bond ratings agencies.
The junk bond issuer may not be able to repay the original principal,i.e, investors risk the chance that they never get their money back.
Bonds often receive this type of low rating when the corporation, municipality or other entity that issued the bond is facing financial trouble. However, many junk bonds also pay higher yields than investment-grade bonds in order to attract investors.

Hybrid Funds refer to a security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.
Another example, 3 years hybrid structures from Mutual funds wherein if you are investing Rs. 100, Rs. 70 is invested into triple A rated bonds and Rs. 30 is invested into either equity markets or they might invest buy an option with the execution date after 3 years.
In such cases, Rs. 70 invested into debt yield atleast Rs. 100(preserving the capital invested).
Rs. 30 might give lot of upside, returns can be multiple of the invested amount at the same time it is quite likely to lose this amount.
But in both the scenarios the capital is protected.

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