TAILIEUCHUNG - HIGH YIELD OR “JUNK’ BONDS, HAVEN OR HORROR

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”. | HIGH YIELD OR JUNK BONDS HAVEN OR HORROR By Mason A. Dinehart III RFC 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 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

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