Junk Bonds or High-yield Debt : What are They ? & Are they a Good Investment ?

Junk! Not a nice word. And when it comes to bonds, not a particularly accurate word, either. Junk is something useless, right? Something you want to toss in the trash? Well, "junk" bonds are definitely not useless. In fact they're extremely useful. Sometimes. So are junk bonds for you? In this video, we'll explore this underdog of the investment world and its turbulent history. We'll also learn why some bonds are dubbed junk and whether you should devote a portion of your financial portfolio to them. Welcome to The Atlantis Report. A junk bond is exactly the same as a regular bond. Junk bonds are an IOU from a corporation or organization or country that states the amount it will pay you back called the principal, the date it will pay you back known as the maturity date and the interest it will pay you on the borrowed money. Junk bonds differ because of their issuers' credit quality. All bonds are characterized according to this credit quality and therefore fall into one of two bond categories, investment grade, and junk. These are the bonds that pay high yield to bondholders because the borrowers don't have any other option. Their credit ratings are less than pristine, making it difficult for them to acquire capital at an inexpensive cost. Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'B A' or lower by Moody's. Junk bonds are risky investments but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation. The US companies borrowed 300 billion dollars in the junk bond market. That equates to five percent of all of the lending done to corporations . Not too shabby;or too junkie . Now in the bond market ; junk is actually just a slang word for the high-yield. Yield of course, is what an investor gets . An interest when they make an investment or make a loan to a company ; by buying their bonds. And you know they won't make adage about risk and the reward . Well the more risk an investor takes; by lending to a riskier company. The more significant reward he or she is gonna get in the form of higher interest. A higher yield . Now when you buy into the junk bond market . when you lend a risky company money . when you buy a junk bond. It's kind of like buying a truckload of old computers . And hoping to get the gold out of them . You know that there's gold in computers ! Well there's gold in some computers and you might find that some of these computers have indeed got little bits of gold in them. All right , and you may find that the first few actually, yield quite a bit of gold . but in the end, of course. you find that a lot of these other computers have got no gold in them. Or maybe they're full of heavy metals or whatever . So it's a risky business. On the other hand. you could find that all of these computers have got traces of gold in them. In which case; you could end up with a nice little bag of gold . At the end; it's going to make you very happy as an investor . Let's talk about companies ; where companies can be risky too . Sometimes they're involved in risky businesses. Sometimes they are involved in hazardous sectors. Sometimes they've got too much debt. Whatever it is . But if you invest in one of these companies by buying their bonds. Effectively lending to them. Then you're going to get a nice big interest payment at the end of every month . Unfortunately if these companies are poorly run you might get one or two or three monthly payments . But then the companies might kind of run out of gas . Run out of the ability to make those interest payments . In which case you're gonna lose your investment . Or potentially on the other hand these companies could be very well-run . Because , I'm making that nice big interest payment every month. If they manage to keep making it throughout the duration of the loan. Then you get your money back in the end . Then you've turned out with an investment ; with a very lovely high yield . Now high-yield companies are risky . So the bonds that they issued those junk bonds come with low credit ratings. Unlike investment-grade loans. Investment grade bonds which have a higher credit rating because they're a safer bet . And let's not forget that investing in any kind of security ; is a bet . Just like , buying a truckload of all computers ; hoping to get gold out of them, is a bet . On the one hand, you could turn out to be really lucky . your bet could come , in and you could end up with a big bag of gold. On the other hand, you could end up bruised poisoned potentially very badly . So to understand junk bonds, let's clarify what bonds are and how they differ from stock. Whereas stocks represent partial ownership of a company, bonds are simply loans. When you purchase a bond, you're agreeing to lend money to the bond issuer, such as a company or a government. The issuer in turn is promising to pay you back the loan with interest by the date of maturity. You receive that interest regularly, often every six months. That fixed payment is why bonds are called fixed-income securities, as opposed to stocks, which carry variable returns. Junk bonds are bonds issued by companies with low credit ratings, as opposed to the investment-grade bonds offered by corporations with better credit and longer track records. Credit-starved companies offer to pay out high interest rates to investors like you, nice enough to loan them your hard-earned money. Because of their high rates of return, junk bonds are also politely called "high-yield bonds." Most say that a good portfolio is 60% stocks and 40% bonds and then to add on the bonds part as you age. I fully disagree because bonds are about to be a terrible investment in the future. Remember that bonds were called certificates of confiscation back in the 1970 due to constantly rising interest rates and inflation. As interest rates are at all time lows it might happen again. When bond yields go up, bond prices go down, it is as simple as that. Where will yields and interest rates go from now on? Junk bonds are great but they should not be treated as bonds. You will do better if you think of Junk Bonds as High Output Stocks. Stock crash from time to time and Junk Bonds will follow them down. This is not all bad because Junk Bonds can really go on SALE from time to time. I like a BIG Sale.











The Financial Armageddon Economic Collapse Blog tracks trends and forecasts , futurists , visionaries , free investigative journalists , researchers , Whistelblowers , truthers and many more