High Yield or junk Bonds

High Yield or junk Bonds - High Yield Or"Junk Bonds Haven...

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High Yield Or "Junk" Bonds, Haven Or Horror By Mason Dinehart III, RFC FEND Securities Expert Witness Submitted February, 2004 Contents An Explanation Of "Junk" Bond Credit Ratings Credit Ratings And Analysis Yield Of "Junk" Bonds Over Treasuries "Junk" vs. "Trash" Terms Oasis or Mirage Suitability Bond Scorecard A high yield, or "junk" bond is a bond issued by a company that is considered to be a higher credit risk. The credit rating of a high yield bond is considered "speculative" grade or below "investment grade". This means that the chance of default with high yield bonds is higher than for other bonds. Their higher credit risk means that "junk" bond yields are higher than bonds of better credit quality. Studies have demonstrated that portfolios of high yield bonds have higher returns than other bond portfolios, suggesting that the higher yields more than compensate for their additional default risk. It should be noted that "unrated" bonds are legally in the "junk" category and may or may not be speculative in terms of credit quality. High yield or "junk" bonds get their name from their characteristics. As credit ratings were developed for bonds, the credit agencies created a grading system to reflect the relative credit quality of bond issuers. The highest quality bonds are "AAA" and the credit scale descends to "C" and finally to "D" or default category. Bonds considered to have an acceptable risk of default are "investment grade" and encompass "BBB" bonds (Standard & Poors) or "Baa" bonds (Moody's) and higher. Bonds "BB" and lower are called "speculative grade" and have a higher risk of default. Rulemakers soon began to use this demarcation to establish investment policies for financial institutions, and government regulation has adopted these standards. Since most investors were restricted to investment grade bonds, speculative grade bonds soon developed negative connotations and were not widely held in investment portfolios. Mainstream investors and investment
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dealers did not deal in these bonds. They soon became known as "junk" since few people would accept the risk of owning them. High Yield "Junk" bonds were invented to enable smaller companies or big investors to use bonds and bond markets to finance takeovers. The original concept was good and legal; but overly aggressive stockbrokers and arbitrageurs, aided by large investment firms, exploited and corrupted it. They used illegal inside information, deliberately-planted misinformation and market rigging to make millions and millions of dollars while, in some instances, destroying profitable old companies. Some of these multimillionaires are now in the penitentiary. Unfortunately, this kind of greed is still rampant. Before the 1980's, most junk bonds resulted from decline in credit quality of
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High Yield or junk Bonds - High Yield Or"Junk Bonds Haven...

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