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Another feature that would augur well for establishment of junk bond market at this juncture is the availability of surplus funds in economy in search of innovative and efficient financial instruments. This can be gauged from the fact that the IPOs of diverse companies during the past quarter have been oversubscribed by a substantial margin.
With amendments to taxation laws treating diverse investment avenues on the same platform, investors with high risk appetite would be inclined to include the instrument in their portfolio of investments.

Other factors that would encourage high level of activity in the junk bond market are: -

a. Academic research has revealed that a well diversified portfolio of junk bonds yield a better rate of return than investments in "Graded bonds" category for a given period of time even after taking into account the possibility of default risk.

b. The risk premium in excess of G-sec yield, in case of junk bond, is far higher than one that is justified by the quantum of risk undertaken.

This ensures that there would be a steady growth in retail investors' participation in the high yield bond market. But success of this market would depend to a very large extent on the relaxation of investment norms of mutual funds, insurance companies, banking companies with regard to their debt investments by the respective regulatory agencies.

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* Contributed by -
Saurabh Joshi & R. T. Sivasubramaniyan,
PGDM - II Finance,
SCMHRD, Pune.