A Sizeable Proportion of Corporate Takeovers Are Financed with So-Called

Essay

A sizeable proportion of corporate takeovers are financed with so-called junk bonds. Such bonds offer bondholders higher rates of return than most other bonds traded because there are no hard assets as collateral to reduce the risk for bondholders in case of a default. The sellers of the bonds hope to be able to meet their obligations to pay these high rates of return to bondholders through the expected increase in profits of the company(ies) just taken over. How do the monitoring problem and the existence of lazy monopolists contribute to the market for junk bonds?