Yield is just the dough you get back after investing an initial sum. It can come in the flavor of bond yield—like a coupon—paying whatever percent face value, based on par value. That is, for a bond trading at par, with face yield of 5%, that bond pays the investor 25 bucks twice a year for that 5% face on a grand invested.
Got it? It is just the percentage rate of return on a bond.
But what if the price of the bond got cut in half? Maybe something bad happened to the company—patent law suit or CEO caught in bed with an alien from Mars—so investors suddenly feared for the creditworthiness of the company. And they sold heavily their bond positions. Now the bonds are selling at 50 cents on the dollar or $500 a unit instead of the standard $1,000. The bonds still have to pay the 50 bucks a year interest but now they yield 10%... 50 bucks of the grand at which they were created.
But yield is also derived in the land of equities. Coca Cola stock trades at 50 bucks a share and pays a $1 dividend. It yields 1/50 = 2%. You get 25 cents 4 times a year for each share you own. And another big note: Equities pay dividends 4 times a year while bonds pay twice.
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Finance: What are High Yield/Junk Bonds?19 Views
finance a la shmoop. what are high-yield or junk bonds? alright well here are low
yield bonds, you know Apple Microsoft you know, safe secure sleep [charts]
like a baby even for Chicken Little those kind of bonds. the sky is not
falling. all right well here are high-yield bonds Sears you know Toys R
Us aren't they bankrupt already best buy well someday bankrupt ,yeah not safe not
secure, the sky among other things like credit ratings is in fact falling. well [definitions on screen]
why do high-yield bonds yield a lot that is they pay a lot of interest to
investors why do they do that answer because they have to. right but
why why do they have to? well because the bonds are risky either the business is
in danger of dying, or the business has borrowed so much money that it's in [ best buy pictured]
danger of not being able to pay back the loans. that is their operating profit is
just barely enough to pay the interest costs on all the loans they've borrowed
so the risk of default is high and investors demand very high interest for
taking on the risk of having to go through a potential bankruptcy. the term
junk was coined in the 1980s when the now-defunct investment bank Drexel [100 dollar bill]
Burnham Lambert sold boatloads of bonds which had dubious creditworthiness in
weak backing and so the boatloads of bonds sank and ended up as basically
junk. and not the Chinese junk that actually sales, a different kind of junk.
anyway unlike your fancy triple-a bonds which you can see here on this lovely [ boat sails on a lake]
table ,those junk bonds were riskier than us women in shark-infested waters with a
bloody nose. so what's the best way to encourage people to do risky possibly
dangerous things ?well pay them a lot of money. so that's why junk bonds yield
such killer returns for investors because otherwise well these things [two people frown in front of bond store]
would never leave the shelf.
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