Module: Regulatory issues in banking and finance
The biggest chunk that about 25% of the $8.5trln overall is held by foreign governments. China tops the list with $1155 billion, followed by Japan $885 billion, United Kingdom $278 billion and oil exporting countries $255 billion. Other big holders of Treasury debt involve local and state governments, individual investors which are brokers, mutual funds, public and private pension funds, holders of US savings bonds, banks and credit unions and insurance companies. (http://www.economicshelp.org)
The increased foreign ownership of government debt is dangerous for every country even for the USA. The USA is the biggest creditor in the world but at the same time this country is the biggest borrower. But, as long as the national debt of the USA is denominated in dollars, it is okay. The point is that there is a risk that is the following: if foreign investors fear that the dollar will fall against their currency they could require a higher interest rates as damages, or they could insist that the Treasury issue bonds denominated in foreign currencies. This wouldn’t be good, because it would move all the foreign exchange risk to the taxpayer. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is possible that it could be forced to do so if the dollar falls stridently and foreign demand for U.S. bonds declines. That will be the point at which their debt problem becomes more than theoretical and they are really on the road to national bankruptcy.
Junk bond, a high-yield bond, is a bond that is rated below investment ranking at the purchase time. These bonds contain a higher risk of default or other unfavorable credit events, but usually pay higher yields than better excellence bonds in order to make them attractive to investors. If someone desires high risk with high return, junk bonds might be the investment for them. It is also known as "high-yield bonds" which are junk bonds that are corporate bonds issued by companies that are on less steady financial balance. That might involve smaller, newer companies that need to increase capital to develop their businesses or well-known companies in front of financial trouble. Junk bonds compensate a much higher yield than investment-grade corporate bonds and Treasury issues. As an investor, if you have an option between supplying in a bond from one company you've never heard of, you are most likely have a preference the one from the blue chip firm. So, riskier companies should pay higher yields rather than blue chip companies. If the option is among a General Motors bond paying 5% or an XYZ Corp. bond paying 10%, rapidly the junk bond starts to look a lot prettier. Very few junk bonds ever fail to pay, but the risk is all the time there, which means that a certain quantity of risks goes with the region. There is also the risk that the bonds of the company might be downgraded more, dropping the value of the bonds with making them more complex to sell on the secondary market. But when the company stays alive, your returns would be outstanding. Bonds which are rated BBB or higher by Standard Poor's or Duff & Phelps, or Baa by Moody's are measured investment-grade bonds. Anything which is rated lower would be considered a junk bond. There is one choice that allows you to decrease your risk whilst still gathering the high returns that junk bonds offer which is a junk bond mutual fund.
There’s a concern that, this post security of financial institutions provides insurance in opposition to their personal bad practices and proceeds. If they are big enough and sure that they won’t be allowed to fail even if they merit by making poor business choices, then that creates a moral hazard. So, what is the moral hazard itself, moral hazard means, correcting their business performances, slightly than doing the right thing, acting...
Please join StudyMode to read the full document