ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
97 Views

How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Intro: Company Formation, Structure, and Inception: Unit Intro
43 Views

Company Formation, Structure, and Inception: Unit Intro. Sorry, Leo DiCaprio fans—we're not going to be breaking down the plot of Inception. We'r...

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
67 Views

Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

See All

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


Share It!


Description:

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.

Language:
English Language

Transcript

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.

Related Videos

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...