The Dictionary of Financial Scam Terms: The truth vs. the scam

 

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High-Yield Investment Bonds (Junk Bonds)

The higher the yield, the higher the risk.  A high-yield investment bond is one that is considered to be of non-investment grade, that is to say rated below BBB by any major independent rating agency, such as Standard and Poor's.

A bond's rating reflects the creditworthiness of the issuer.  Therefore, as with DEBENTURES, an investor must be extremely familiar with all aspects of the issuer since what the investor is doing is lending the issuer money.  

 

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The gamble is whether or not the borrower issuing the bond has the capability of making good on his word.  Usually, the borrower's word is the only collateral backing the bond.

Since the borrower does not have a high creditworthiness rating, it must pay more for its money.  This means that the interest on a High-Yield Investment Bond is higher than on a well-rated bond.  If all goes well, the investor will make more than by investing in regular bonds.

An additional gamble is whether or not the bond will be re-rated to a higher creditworthiness before maturity.  If this is the case, then it is possible that the value of the bond itself will diminish interest-wise, although the borrower's rating (value) has increased.  Very tricky investing, particularly as one invests in very low rated bonds which may be issued by bankrupt companies looking for recovery assistance.

 

 

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