A junk bond index should be created taking into account various sectors, range of qualities in the junk bonds, different risk characteristics and their liquidity. The sample (number) of securities must be carefully chosen. The introduction of a junk bond index would help the investors to properly diversify their portfolio and protect them against inflation risk.

5.3. Phase 2: Stabilization Under Market Forces

Phase 2 would essentially be a learning phase, where the operations would be closely monitored, and loop-holes would be plugged. Thus, the market would be allowed to stabilize under the economic forces of demand and supply. This will help in increasing the liquidity in the secondary market. Analytical tools would be developed for pricing the market risk and evaluating sensitivities to interest rates and economic risks.

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.