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Bonds
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Type of Yields
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Bond Rating Agencies
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The Yield Curve
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Laddering
Types of Bonds
- Corporate Bonds
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Municipal Bonds
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Asset Backed Securities
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High-Yielding Securities –
Junk Bonds
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Enhanced Trust- Preferreds
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Zero-Coupon Bonds
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STRIPS Bonds
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Internotes
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International Bonds
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Brady Bonds
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Junk
Bonds
The American Heritage
Dictionary defines junk as “something to be discarded or cheap.” Believe it!
High yielding securities are called junk bonds for a reason. My biggest
concern is that investors are chasing yields, possibly at the expense of
principal repayments. Choosing yield over principal repayment is the worst
investment decision one can make. Going back to your broker after a bond
defaults is meaningless. It just opens a conversation sounding something
like this: “You must have known the risk before buying. You signed off on
it! I told you not to buy it! Why did you buy it? They’re called junk bonds
for a reason! You just made a bad investment. Sorry, I have to go. Bye!”
A junk bond is a
debenture, where the issuer may or may not have the “financial wherewithal”
to repay the principal and interest on the note when due. High yielding
securities are bonds or notes with below investment grade ratings. Ratings
of Ba by Moody’s or BB by Standard and Poor’s are considered junk bonds.
Most new bonds that are sold are non-investment grade securities. Moody’s
defines a Ba rating as follows:
Nowadays, many bonds are
created as junk bonds. Prior to the 1980’s, however, most bonds started out
as investment grade securities. If their financial performance deteriorated
to a speculative rating, they were called “fallen angels”; if the company’s
ability to repay their debt improved, they were called “rising stars.” In
the late 1980’s the investment firms, led by Drexel-Burnham, used public
junk bonds as a funding vehicle for acquisitions. Once the public bought
into the idea, it became less expensive to issue public junk bonds than to
issue private debt (presumably because there was greater liquidity). Junk
bonds remain an acceptable way of investing, until one loses his or her
money!
Covenant-Lite Debt: High yielding, leverage loans issued without
protective maintenance tests. Debt covenants are there to protect the debt
holders; allowing them to call a loan, thus protect their principal, if the
financial health of the underlying company declines. Purchasing fixed income
securities, without default protection, may result in larger losses, than
necessary, if defaults occur.
High yielding debt
securities have many of the same trading characteristics as stocks. Money
managers with fiduciary responsibility to invest funds have limited ability
to purchase these securities.
Junk bonds are the real
estate equivalent of buying urban distressed properties.
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