High Yield Bonds Essay

1776 words - 7 pages

High Yield-Bonds

A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds, they are diversified by industry group and issue type. Due to the high minimum size of bond trades, most individual investors are best advised to invest through high yield mutual funds.
High yield bonds or "junk" bonds get their name form their characteristics. As credit ratings were developed, 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 the "D" of default category. Bonds are considered to have and acceptable risk of default or investment grade and encompass "BBB" bonds and higher. Bonds "BB" and lower are called speculative grade and have a higher risk of default. Most investors were restricted to investment grade bonds, speculative bonds developed negative connotations and were not widely held investment portfolios. Mainstream investors and investment dealers did not deal in these bonds. They result in junk since few people would accept the risk of owning them. In the 1980s, most junk bonds resulted from a decline in credit quality of former investment grade issuers. This was a result of a major chance in business conditions, or assumption of too much financial risk by the issuer.
Different types of bonds
Along with the many different characteristics of bonds such as, the way the pay their interest, the market they are issued in, the currency they are payable in, protective features and their legal status. Bond issuers may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category.
Government Bonds
Supranational Agencies
A supranational agency is like a World Bank, that leaves assessments or fees against its member governments. The most important factor is the support and taxation power of the underlying national governments that allow these organizations to make payments on their debts.
National Governments
The "central or national governments also have the power to print money to pay their debts, as they control the money supply and currency of their countries. This is one reason why investors consider national...

Find Another Essay On High Yield-Bonds

Financial market Essay

2665 words - 11 pages treasuries had an increase in their interest rates in from 4%, 8%, to 10% respectively (Levit, et al. 4). Monetary policy was only tightened towards the end of 1970s, thereby causing a fall in inflation. Yet the long-term interest rates remained high after disinflation. In 1985, ten-year Treasury bonds had a 10% interest rate even with the decline in inflation to less than 4%. Investors are faced with the risk of a rise in inflation that will push the

Creating A Diversified Investment Portfolio Essay

1169 words - 5 pages savings bonds, offer tax advantages. From higher risk, high-yield, bonds to lower risk Treasury bonds, the bond market offers something for the needs of each individual portfolio.Cash investments constitute the third basic investment category. Certificates of Deposit and bank accounts represent some of the available cash investments. Cash investments are generally included in a diversified portfolio so that the portfolio has some liquid assets

Fund Structure Report: The Client´s Asset Porfolio from London Stock Exchange

1239 words - 5 pages fund structure The client’s asset portfolio consists of bonds, equity funds, ETF and stocks invested from London Stock Exchange. First of all, according to Mary’s premier risk preference, 30% of the assets have been invested in bonds. The bond investment percentile of 30% is usually regarded as a preferable long run investment for a risk aversion investor for the reasons of that the annual yield of bonds has already been fixed and the default

Basic Economics: The Federal Reserve Board; Monetary and Open Market Policies

918 words - 4 pages ? Money loses its value over time (about 3% a year) and will that the Fed can calculate about how much the money supply will expand when the bonds get cashed in. Another reason the Fed will issue relatively high yield bonds is that the Fed usually doesn't care too much about tomorrow are they do today. The Fed will also buy bonds to increase the money supply. Bonds are some powerful stuff.We have covered all the things the Federal Reserve Board will

The Force of a Nuclear Weapon

1326 words - 5 pages speeds. These two energies combined literally tear apart atomic bonds and are unstoppable until they loose their cohesion. The light that at the epicenter usually is about a quadrillion times brighter than the sun per surface area unit. The heat produced by matter being exposed to such high level of such powerful energy produces temperatures which are sixty to one hundred million degrees centigrade. This is about ten thousand times the surface

AN ANALYSIS OF THE EMERGING BOND MARKET

1841 words - 7 pages ratio's of the emerging bond funds suggest that investing in international sovereign bonds through emerging bond funds provides a higher risk adjusted returns than a high yield domestic bond funds. The emerging bond funds thus provide a feasible substitute to U.S Domestic bonds.CONCLUSIONBeing a relatively young market there is still a lot to learn about the emerging markets. An increase in globalisation rate and the improvement of economies of

Introduction

1193 words - 5 pages induces traceable migration of two strands of DNA on gel and allows selective excision of any of the strands.9 Urea breaks the hydrogen bonds between the strands of the amplicon as the DNA melting temperature is lowered, and causes differential migration of the strands in the gel.10 In this case, the sense strand has to be extracted and purified, which makes the process cumbersome and time-consuming, even though it can potentially produce high

Equity vs Debt

637 words - 3 pages sectional variation suggest that ratings agencies use financial statement information. Hand, Holthausen and Leftwich (1992) found that unanticipated ratings changes are associated with significant bond and share price effects, especially when bonds are being downgraded. Bankruptcy Prediction Creditors and equity investors alike are interested in knowing the likelihood of a firm experiencing financial distress. A high probability of

Financial Markets Notes: The Flow of Funds and Determination of Interest Rates

2715 words - 11 pages which occur more than 1 year in the future are usually discounted to a present value using a re-arrangement of the compound interest formula used above. Thus:For example, a cash flow of $1,000 to be received in 3 years, discounted using a yield or discount rate of 9.25%, would give the following present value:In topic 6, the pricing of long-term fixed interest securities (eg. Bonds) is examined in more detail.Objective 3Outline and explain the

Bond and Derivatives Market Innovations

2750 words - 11 pages usually used by the firms operating in an unstable economy, where interest rates are subject to frequent change (The Bond Market Association, 2005).According to Robbins and Schatzberg (1986) the callable bonds encourage the companies to rely more on issuing debt with long-term maturity, because the callability feature allows them not "get lock" and adjust their issued bonds to the ongoing interest rate. Moreover, the investor has higher yield on

Market Forecast

857 words - 3 pages now freely available in the financial markets. Mortgage rates are only now approaching 6%; strangely, none of this seems to worry the bond market. In particular, bond folk point to the flattening of the yield curve is a traditional sign that the economy is slowing down. But keep in mind currently 10 yr bonds are yielding at 5.10% percent and interest rates are now at near 5 percent, now if they cross each other that would be an in adverted yield

Similar Essays

Interest Rates And Bond Valuations Essay

2298 words - 9 pages ). They are ordinary coupon bonds with the same payment cycles as all other standard bonds. Government bonds are also issued at the state state level called municipal bonds or “munis” (Ross, Westerfield and Jordan, 2011). They are considered to have some associated default risk. They are excused from federal taxation, but are sometimes subject to state taxes. For this reason, these bonds are attractive to high tax bracket income investors (Ross

Municipal Bonds Why To Invest In Them.

1299 words - 5 pages benefits, a high degree of safety, a wide variety of choice and marketability. Municipal bonds are debt obligations issued by states, cities, counties, and other governmental entities in order to raise money for projects such as schools, bridges, hospitals, sewer systems, and other projects. Because most of these projects are beneficial to the public good, they are usually tax exempt, or tax free. But there are other examples, such as the building

A Standard Guide In Bond Investments

3347 words - 13 pages return for their investment. Whereas, conservative bonds such as government and corporate bonds offer lots of potential and investment growth in the long run. Though there are risk and safety associated with many investments, the key is to decide how much risk are involved, and research the quality of investments that often offer higher returns without the potential of unnecessary high risk. In spite of the recent slump in the economy more

This Report Includes Information Regarding To The Background And Significance Of Interest Rate To The Capital Market.

2439 words - 10 pages )The government issue securities of short-term Treasury notes and long-term Treasury bonds in order to deal with liquidity problem (Viney, 2000: p26). The yield rates of the treasury bonds are shown in Figure 2 as below:Figure 2. The yield curve of the Treasury BondsSource: http://www.rba.gov.auIt can be observed from Figure 1 that the interest rate was reaching a top of18% in 1989, meanwhile the yield rate of Treasury bonds also situated at high