The bond was originally offered at par of $1,000 with a coupon of 3.2%. It was supposed to be rock-solid safe. It was owned by nervous nellies and insurance companies and foreign governments as a store of wealth...all playing defense, not offense.
But then bad things happened to the bank who issued those bonds. Bad trades, fraud, and that whole ignoring-of-the-internet thing. So the creditworthiness behind the bond plummeted, and it now trades for $300, still with that same $32 a year coupon. Only now, the bond is a high yielder..."accidentally"...and yields over 10%.
The same can happen to dividend-paying equities. All is grand and safe and secure and gravy...until it's not.
Related or Semi-related Video
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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