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Finance: What are High Yield/Junk Bonds? 19 Views

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What are high yield/junk bonds? Junk bonds are called junk for a reason. They are really risky, but because of this risk, they can pay very well. They also have low credit ratings. The reason they are so risky is because the companies that issue them are usually in some sort of financial distress, and it’s believed that they will struggle to repay them. So they promise high interest payments to obtain the income from bond purchases.

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00:00
finance a la shmoop. what are high-yield or junk bonds? alright well here are low
00:08
yield bonds, you know Apple Microsoft you know, safe secure sleep [charts]
00:12
like a baby even for Chicken Little those kind of bonds. the sky is not
00:17
falling. all right well here are high-yield bonds Sears you know Toys R
00:20
Us aren't they bankrupt already best buy well someday bankrupt ,yeah not safe not

00:25
secure, the sky among other things like credit ratings is in fact falling. well [definitions on screen]
00:32
why do high-yield bonds yield a lot that is they pay a lot of interest to
00:36
investors why do they do that answer because they have to. right but
00:40
why why do they have to? well because the bonds are risky either the business is
00:45
in danger of dying, or the business has borrowed so much money that it's in [ best buy pictured]
00:50
danger of not being able to pay back the loans. that is their operating profit is
00:54
just barely enough to pay the interest costs on all the loans they've borrowed
00:59
so the risk of default is high and investors demand very high interest for
01:04
taking on the risk of having to go through a potential bankruptcy. the term
01:08
junk was coined in the 1980s when the now-defunct investment bank Drexel [100 dollar bill]
01:13
Burnham Lambert sold boatloads of bonds which had dubious creditworthiness in
01:17
weak backing and so the boatloads of bonds sank and ended up as basically
01:23
junk. and not the Chinese junk that actually sales, a different kind of junk.
01:27
anyway unlike your fancy triple-a bonds which you can see here on this lovely [ boat sails on a lake]
01:31
table ,those junk bonds were riskier than us women in shark-infested waters with a
01:36
bloody nose. so what's the best way to encourage people to do risky possibly
01:40
dangerous things ?well pay them a lot of money. so that's why junk bonds yield
01:45
such killer returns for investors because otherwise well these things [two people frown in front of bond store]
01:49
would never leave the shelf.
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