Bad Paper
Bad paper is an unsecured (no collateral) short-term fixed income instrument (bond) that is issued either by a corporation, city, state, or country, that has a high probability of defaulting on its promissory notes. Bad paper equals junk bonds. Junk bonds are...risky.
Here's the deal: The entity issuing those bonds is trying to keep the metaphorical sinking ship afloat. The entity needs cash. Issuing the bonds produces the cash to the issuer promising to pay back the dough eventually. However, because of the entity's ill financial health, the bonds must be issued at a deep discount, and/or at a very high interest rate. A speculative investor might still buy the bad paper (again, junk bonds), because if the issuer can turn it around, the investment could bring significant profits and above-average interest payments to investors.
A good example: Puerto Rico bonds. For a long time, Puerto Rico bonds were viewed as losers, as the island was near default and hit hard by the hurricanes in the fall of 2017. However, recent headlines (from March 2018) state "Puerto Rico forecasts $6 billion surplus as bonds soar," reflecting the unexpected improvement in the island's economy, as well as hopes for Puerto Rico to resolve its continuing bankruptcy problems.
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Finance: What is Bankruptcy?260 Views
Finance a la' Shmoop what is bankruptcy well in the old days
this was bankruptcy you'd go to prison if you couldn't pay your bills and [People in prison for bankruptcy]
unfortunately there weren't and still aren't a lot of legal high wage earning
opportunities in prison working your way out of debt on the chain gang wasn't [Prisoners working outside]
really a thing back then so instead the burden would be on your family to pay
back the loan you'd promised to pay back and didn't ugly situation it paved the [Officer knocking on a prisoners family member to pay their debts]
way for some well today bankruptcy has a range of flavors that it comes in but
basically it exists as a legal vehicle to avoid the aforementioned situation a [Bankruptcy van driving]
bankrupt person and/or corporation stands in front of a judge they turn
their pockets inside out with a sad face and the judge then decide who will be [Person opens their pockets inside out in front of a judge]
paid when and how much well how does she decide the order for who gets paid back
when? well, it usually prioritizes employees and vendors owed a paycheck
above banks who have made a loan and under that umbrella all different types
of loans have different priorities if the bankrupt individual owns a home it's [bankrupt individual in his home on the toilet reading a newspaper]
usually sold out from under him and anything left after paying off the
mortgage is used to pay others even if you do survive a bankruptcy your credit
is pretty much ruined who's going to want to loan you money once you've
proven that you're not good with being loaned money yeah if you've defaulted in [a really low credit score chart for a bankrupt individual]
the past on promises to pay people back why wouldn't you do the same thing again
well remember that twenty dollars you loaned your buddy Eric that he never [Person loaning 20 dollars to friend Eric
paid back well how eager are you going to be to hook him up with another twenty
especially since you'd only be feeding his betting on frog fighting habit yeah [Eric betting money on frog fighting]
not so much so long Eric you'll get the help you need!
Up Next
Misappropriation. Misrepresentation. Miss Independent. Yeah... we'll get into all the Little Misses here. (Hint: "mis" = "bad")