Financial Crisis Essay
Companies normally issue bonds to raise capital. According to Goldsmith (2010), corporate bonds contribute significantly to companies’ source of finances and thus an entire economy. When the financial crises spread out from the housing and mortgaging sector and reached the corporate bonds market it was sure going to reach the global economy. The government and companies had challenges in meeting their operations cash requirements. In fact, the corporate bonds contribute to the overall United States corporate bond by close 50%.
The mutual funds investors were also trying to handle their liquidity needs. They were doing this by attempting to sell off their corporate bonds and retaining the security bonds which had now become ‘toxic’. This was around August of 2007. The market sort became too flooded with every institutional investor trying to liquidate their corporate bonds after the securitized investment became illiquid. As a result, the prices for the corporate bonds also got affected negatively. This according to Devine (2011) implied that it was hard for different companies in different sectors in the economy to finance their operations, they became crippled and thereby the financial crises from the housing and mortgaging to security bond to corporate bond finally hit the real economy and spread worldwide.