Junk Bond Investments And Its Effects On Investors And Issuers

Even though these products are issued as long-term securities, they have many of the same features as traditional short-term ones. These debt products are both callable and puttable which gives the issuer as well as the investor flexibility. The call feature allows the issuer to buy back the bond. For issuers who are not sure how long they will need funds, they can get out of the agreement by calling the bond. Same goes for the investor; they can exercise the put option and receive their money back. In order to make these products more liquid, investment banks are used as remarketing agents. These agents resell the bonds at new rates to other investors. However, there is a cap on how high the rates on the bonds can be reissued at in order to limit the coupon payments. These variable rate debts also track the JJ Kenny index. The JJ Kenny index is an index similar to the S&P 500 but for municipal bonds. Also, a synthetic fixed rate debt can be created from combining a variable rate debt and a SWAP. Given the two proposals, the state is faced with three forms of debt. The first form is a fixed rate option that would provide the state with 20 year serial issued bonds with fixed

"The Wall Street Journal" found that the current bond yields were 0.20. These bonds are issued by the US government. In view of the fact that Fannie Mae Securities is a mortgage-backed securities issued by FNMA. We have observed that Fannie Mae and Treasury yields are somewhat different because FNMA Personal Securities and Treasury bonds are issued by the US government. Therefore, we note that there should be some difference between the two rates. As a result, Fannie Mae gets money from investors and financial institutions and sells their mortgages.

Investment grade corporates were not as affected by the post-election price free-fall experienced by other select sectors of the fixed income markets. Notwithstanding the correction in rates, corporates delivered a respectable total return in 2016. The Bloomberg Barclay’s Intermediate Corporate Index, which is a proxy for our investment grade strategy focus, earned 4% last year, outperforming the comparable Treasury index, which posted a 1% total return. As we begin the New Year, nominal rates are attractive, and corporates continue to offer a meaningful yield advantage over Treasuries. While valuations have narrowed from a year ago, current credit spreads are in line with multi-year averages and have room to compress further. The compelling entry point is further buoyed by expectations for lower net supply, due in part to a shallower pipeline of M&A activity and a heavy maturity schedule. We expect intermediate investment grade corporates to earn between 2%-3% this year, outpacing Treasuries.

The large debt sale from Actavis underscores how investors are buying up income-generating investments when yields on safe government debt remain low. Corporate bonds pay more yield than safe government debt to compensate for the greater risk that investors won’t get paid back. (Cherney, 2015)

During the mid-1990s, the US economy had maintained stable growth, low unemployment, and low inflation; it was the longest undisrupted growth period post- the Vietnam War, the Dot.com Boom, and the stock market crash of 1987. Therefore, many politicians, economists, and consumers were under the assumption that the economy was very stable. But in reality this growth period was a façade because it was built on mortgage-backed securities. Ultimately, since fragility does not change, mortgage-backed securities was one the main catalysts for the 2008 financial crisis, a crisis that is still affecting the country today. Throughout this paper, I hope to inform you about the causes and effects of mortgage-backed serecurties.

The U.S. economy is being supported by huge amount of money related printing, Federal stock and bond buys and compelling influence in every aspect of the market. While these strategies have given the illusion of success, or, best case scenario a manageable moderate developing economy, the debt now in the framework is unsustainable.

b) The ratings methodologies employed by these various bond rating agencies are a mixture of financial performance, information and subjective objectives and management quality information. All of this information is synthesized for the purpose of using it to predict the creditworthiness of the bond issuer, which is inversely related to the risk of default. Based on the above bond rating methodology,

. These five factors are most responsible for securities innovations including pay-in-kind bonds, inflation-indexed bonds, convertible and exchange bonds specifically designed to mitigate risk while controlling short sales of debt equities they were tied to, in addition to the fine-tuning of credit default swaps and interest rate swaps meant to drive down the overall costs and risk of transaction while increasing potential returns (Marquis, Cunningham, 1990). These and other innovations that occurred during the 1980s were also designed to assuage or mitigate the exceptional

For years, big businesses have declared the Australian debt market as too small and uncertain. Australia had a sharp drop in funding costs that had brought the attention of many high-profile U.S. companies such as Apple Inc., Intel Corp., and Coca-Cola Co. These companies have recently turned to Australia for the first time to raise debt with kangaroo bonds. A Kangaroo Bond is a type of foreign bond that is issued in the Australian market by non-Australian firms and is denominated in Australian currency. Major corporations and/or investment firms looking to diversify and improve their overall

Government’s backing of Fannie Mae and Freddie Mac has enabled these corporations to engage in more risk than necessary. During 2003, Fannie Mae and Freddie Mac had a combined outstanding debt that was equaled 39 percent of the total outstanding U.S. public debt (Thomas, 2008, p. 1). GSEs misuse resources by implementing risky investment strategies and taking on excessive risk that

WorldCom has the option to extend its bank loan credit facility or to issue this large $6 billion in debt. It plans to use the rolling commercial paper program to pay British Telecommunications for MCI’s share purchases, and then use bond proceeds to pay off the commercial paper program. This signals that WorldCom does not need the money immediately for a single corporate purpose, and does not need the money immediately. Therefore, perhaps it makes sense for WorldCom to issue the bonds in smaller installments rather than flooding the market with $6 billion in debt all at once. The first reason for this is that, if an underwriter must first purchase the bonds before selling to investors, an underwriter may demand greater spread in order to justify taking down an entire $6 billion in debt using the bank’s capital assets. The second

The fourth and final threat facing our economy is the necessity of short-term loans. In an effort to reestablish tangible capital, banks are beginning to cut back on short-term loans. “If the short-term commercial paper and money markets were to break down, the economy could go into a severe collapse because solvent and profitable businesses would be unable to attract working capital” (Sachs, 2008). This kind of collapse in financial liquidity is the basic reason why the United States economy fell by around twenty-five percent during the Great Depression (Sachs, 2008). Already, some of the biggest names on Wall Street have disappeared into thin air. Some attempts have been made to bring liquidity back to financial institutions.

It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.

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,

Enclosed is a copy of “Group Assignment” about the understanding of CDOs. This report is aim to critically examined how CDOs may help banks to avoid liquidity risk and create more assets, and also problems in term of the purpose of CDOs, the role of three mechanisms in CDOs and problems faced in CDOs. After that, it discusses how CDOs created problem for Lehman Brothers by analysis subprime mortgage crisis. Finally, this report provides some recommendations for making the CDOs as effective liquidity risk