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On chapter 6 of the intelligent investor with commentary by jason zweig Pg:147 is discussing about junk bonds. I ran through the text however I have some curiosity that I want to get addressed.

Here is the text:

Unfortunately, most junk-bond funds charge high fees and do a poor job of preserving the original principal amount of your investment. A junk fund could be appropriate if you are retired, are looking for extra monthly income to supplement your pension, and can tolerate temporary tumbles in value. If you work at a bank or other financial company, a sharp rise in interest rates could limit your raise or even threaten your job security—so a junk fund, which tends to outperform most other bond funds when interest rates rise, might make sense as a counterweight in your 401(k). A junk-bond fund, though, is only a minor option—not an obligation—for the intelligent investor.

I have bolded out the concept which I didn't grasp. My questions are follows:

1.If I work in a bank and interest rates are rising then how can it put me in a job security risk since banks will have more profits with higher interest rates and there is not need for employee layoff.

  1. What does it mean when it says that the junk fund will outperform other bond funds when interest rates rise?Doesn't junk fund always provide better return than other bond funds assuming that risk of default is low?
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If I work in a bank and interest rates are rising then how can it put me in a job security risk since banks will have more profits with higher interest rates and there is not need for employee layoff.

See the recent examples of the Silicon Valley Bank and the First Republic Bank. There were a few more recently that failed similarly. The problem when interests rise is liquidity since most of the banks' funds are invested in fixed income assets (treasuries and such) which tend to go down in value when interests go up.

What does it mean when it says that the junk fund will outperform other bond funds when interest rates rise? Doesn't junk fund always provide better return than other bond funds assuming that risk of default is low?

"Junk" means the risk of default is high. That's what the term means to begin with. Junk bonds tend to have higher interest rates to begin with, so when interest rates go up their values don't go down as much as other lower interest paying bonds.

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  • Also, if one thinks of interest rates as the price of money in the form of loans, then as prices rise, demand will fall. If you work at a bank, fees on new loans help pay a significant amount of compensation, so there can be pressure on jobs if loan volumes drop significantly.
    – user68318
    Jul 28, 2023 at 16:29

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