high-yield bond

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions
by Joshua Rosenbaum , Joshua Pearl and Joseph R. Perella
Published 18 May 2009

For investors, which typically include hedge funds and CDOs, second lien term loans offer less risk (due to the secured status) than typical high yield bonds while paying a higher coupon than first lien debt. High Yield Bonds EXHIBIT 4.16 High Yield Bonds High yield bonds are non-investment grade debt securities that obligate the issuer to make interest payments to bondholders at regularly defined intervals (typically on a semiannual basis) and repay principal at a stated maturity date, usually seven to ten years after issuance. As opposed to term loans, high yield bonds are non-amortizing with the entire principal due as a bullet payment at maturity.

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Due to their junior, typically unsecured position in the capital structure, longer maturities, and less restrictive incurrence covenants as set forth in an indenture (see Exhibit 4.23),153 high yield bonds feature a higher coupon than bank debt to compensate investors for the greater risk. High yield bonds typically pay interest at a fixed rate, which is priced at issuance on the basis of a spread to a benchmark Treasury. As its name suggests, a fixed rate means that interest rate is constant over the entire maturity. While high yield bonds may be structured with a floating rate coupon, this is not common for LBO financings. High yield bonds are typically structured as senior unsecured, senior subordinated, or, in certain circumstances, senior secured (first lien, second lien, or even third lien).

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In the event of bankruptcy (and liquidation), second lien lenders are entitled to repayment from the proceeds of collateral sales after such proceeds have first been applied to the claims of first lien lenders, but prior to any application to unsecured claims. 152 Unlike first lien term loans, second lien term loans generally do not amortize. For borrowers, second lien term loans offer an alternative to more traditional junior debt instruments, such as high yield bonds and mezzanine debt. As compared to traditional high yield bonds, for example, second lien term loans provide borrowers with superior prepayment optionality and no ongoing public disclosure requirements. They can also be issued in a smaller size than high yield bonds, which usually have a minimum issuance amount of $125 to $150 million due to investors’ desire for trading liquidity. Depending on the borrower and market conditions, second lien term loans may also provide a lower cost-of-capital.

The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life
by Alexander Green
Published 15 Sep 2008

(And, technically, junk bonds are safer than stocks because they represent a senior claim on the assets of the company.) 2. High-yield bonds are extremely tax-inefficient. Yes, their interest payments are taxed at your marginal tax rate, not the lower capital gains rate. But you can avoid this problem by owning them in your IRA or other qualified retirement plan, as I describe more fully in Chapter 10. 3. High-yield bonds are more closely correlated to stocks than investment grade bonds. True again. But so what? The two asset classes don’t move in lock step and there are plenty of periods when high-yield bonds perform better than equities. To those who insist high-yield bonds are simply too risky to include, remember the words of junk bond king Michael Milken: The rating on triple-A bonds only has one way to go—down.

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Excluding these lesser-owned assets is a shortcoming of other investment models. The performance of the Gone Fishin’ Portfolio testifies to that. But let’s examine the rationale, starting with high-yield bonds. A 10% exposure to the high-yield bond market is one of the reasons the Gone Fishin’ Portfolio has beaten the S&P 500, while taking less risk than being fully invested in stocks. Despite the pejorative name “junk,” these bonds offer a number of advantages. Number one, high-yield bonds have traditionally returned more than investment-grade bonds. For example, the Vanguard High-Yield Corporate Fund, which has been around for almost 30 years, has returned 9% annually since its inception.

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The Vanguard Total Bond Market Index Fund has returned only 6.7% in the more than two decades it has been around. What’s not to like about the high-yield numbers? Second, high-yield bonds have a fairly low correlation with investment-grade bonds, like Treasuries and AAA corporates. That’s what we want when we asset allocate. Third, owning a professionally managed, broadly diversified portfolio of high-yield bonds is a lot less risky than owning just a handful of individual bonds. Blending high-yield bonds with the other nine asset categories actually reduces your overall portfolio volatility while increasing your returns. Still, many asset allocators give them a pass.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

Given the discussion in the last chapter, you should have an understanding of what I have in mind and how this develops. I’ll explain through the example of high yield bonds: At the start, appropriately risk-averse investors apply stringent credit standards to the issuance of high yield bonds. The same healthy economic environment that facilitates bond issuance makes it easy for companies to service their existing debt (meaning defaults are scarce). Thus high yield bonds—with their generous interest coupons and little damage from defaults—provide solid realized returns. Those returns convince investors that high yield bond investing is safe, attracting increased capital to the market.

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This introduces the concept of credit spreads. Our hypothetical investor wants 100 basis points to go from a “guvvie” to a “corporate.” If the consensus of investors feels the same, that’s what the spread will be. What if we depart from investment grade bonds? “I’m not going to touch a high yield bond unless I get 600 over a Treasury note of comparable maturity.” So high yield bonds are required to yield 12%, for a spread of 6% over the Treasury note, if they’re going to attract buyers. Now let’s leave fixed income altogether. Things get tougher, because you can’t look anywhere to find the prospective return on investments like stocks (that’s because, simply put, their returns are conjectural, not “fixed”).

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Pension fund: But what if it’s worse than that? HM: The average default rate in the high yield bond universe—without assuming any ability to avoid defaults through skillful credit selection—has been 4.2% per year. Resulting credit losses of 2–3% clearly wouldn’t do much to jeopardize the results on this investment. Pension fund: But what if it’s worse than that? HM: The worst five years in history for the universe averaged 7.3%—still not a problem. Pension fund: But what if it’s worse than that? HM: The worst one-year default rate in high yield bond history was 12.8%. That still leaves plenty of return here. Pension fund: But what if it’s worse than that?

All About Asset Allocation, Second Edition
by Richard Ferri
Published 11 Jul 2010

The following section looks as these sectors. High-Yield Corporate Bonds High-yield bonds are often referred to as non-investment-grade bonds, speculative-grade bonds, and junk bonds. Unlike investment-grade bonds, high-yield bonds have credit ratings that are in the lowest tier. They have S&P and Fitch ratings of BB or lower and Moody’s ratings of Ba or lower. CHAPTER 8 158 Several entities issue high-yield bonds, including corporations, municipalities, and foreign governments. As a group, these securities are expected to earn a higher return than investment grade bonds. High-yield bonds have a separate and distinct risk above and beyond credit risk because there is a real danger that the issuers will default on their obligations.

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For example, if you place 10 percent of your overall portfolio in a junk bond fund, you might consider reducing your equity allocation by a couple of percentage points to keep the overall portfolio risk at the same level as it was before adding high-yield bonds. Personally, I have never found the need to do this. You might decide otherwise. One note of caution, I do not recommend buying individual high-yield bonds because of their high trading costs and a genuine lack of investment information. A better approach is to purchase a low-cost mutual fund that concentrates holdings in high-yield bonds. Mutual funds provide instant access to a broadly diversified portfolio of high-yield bonds that have been selected by an experienced manager. A couple of low-cost BB–B-rated high-yield U.S. corporate bond funds are listed at the end of this chapter.

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High-yield spreads tend to lead the stock market in forecasting future economic activity. Spreads started widening in October 2007 at the same time the stock market hit a new all time high. In November 2008, high-yield bonds started to recover several months earlier than the equity market turned higher. High-yield bonds were fully recovered in October 2009, while the stock market had only made up half the losses from the bear market. At the time, the S&P 500 crossed 1,050, which was well below the 1,552 October 2007 high. High-yield bonds are volatile. Accordingly, an adjustment may need to be made in your overall stock and bond asset allocation if you are targeting a certain risk profile for the portfolio.

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the JunkBond Raiders
by Connie Bruck
Published 1 Jun 1989

Conoco, 134 consent decrees, 37, 120, 160, 279, 321 Considine, Frank, 105, 122–26, 135–136, 138, 140, 145, 147–48 owner-managers as viewed by, 263 Consolidated Cigar, 198 Continental, 173, 175 convertible debt, 28, 38, 152, 269 defined, 27 hybrid (“Western”), 69 corporate America: Milken’s transformation of, 14, 19 Milken’s views on, 12 Corporate Bond Quality and Investor Experience (Hickman), 11 corporations: below-investment-grade, 11, 45 investment-grade, defined, 27 mergers of, see junk bonds, junk-bond takeovers; takeovers rating of, 10–11, 27, 45 cosmetics business, 234–35 Coss, Lawrence, 290–92 coupons, on bonds, 73, 82 CPC International, 233 Crane, 97 Cranston, Alan, 258 credit cycle, Grant’s theory of, 268 Crown Zellerbach Corporation, 17, 208 Cuozzi, Howard, 279 Dahl, James, 116–17, 291, 311, 325, 334, 336–37 D’Amato, Alfonse M., 171, 259–60 Dan River, 161 Davis, Martin, 200, 294–95 Davis, Marvin, 145 Daylin Company, 39, 292, 326 DBL Americas Development Association, 353 Dean, James, 271 Dean Witter, 65 debt: convertible, see convertible debt in fall of 1986, 269 Grant’s views on, 266–68 preferred stock compared with, 265 refinancing of, 108–9, 250, 269, 290 senior, 45–46, 98, 123–24, 166 straight, 27, 28 subordinated, 45–46, 59, 123, 166, 246 tax law and, 263–64 Third World, 254–55, 353 debt-to-equity ratios, 262, 269, 310 “deep-discount” bonds (fallen angels), 27, 38, 44, 119, 346 de la Madrid Hurtado, Miguel, 353 De Laurentiis, Dino, 54 Delaware Chancery Court, 199, 225–27, 232 Delaware State Supreme Court, 218, 227 depreciation, 113, 172 deregulation, 91, 97, 171 Diamond Shamrock, 322 Dillon, Read and Company, 30 discount-bond mutual funds, 33 Walt Disney, 13, 107, 164, 167, 291 diversification, 46, 199, 251–53 divestitures: Law’s views on, 263 Revlon and, 210, 211, 231 Dole, Robert, 258–59 Dominick and Dominick, 43 Donaldson, Lufkin and Jenrette (DLJ), Inc., 164, 169, 251, 253, 334 Dorchester Government Securities, 82, 300, 312 Dorfman, Dan, 257 Dove, Guy, III, 132, 279–80, 282, 284, 327 Drapkin, Donald, 135, 136 Revlon battle and, 194, 196, 199, 208, 215, 218, 220, 222, 225–26, 234, 237–39 salary of, 237–38 Drexel, Francis, 26 Drexel, Morgan and Company, 26 Drexel and Company, 26 Drexel Burnham, 30–40, 42–48 bonus pool at, 43–44 cultural clash at, 42 finance department changes at, 43–44 “high-value-added” course of, 46 medium-sized company growth and, 42–43 Milken’s firm within the firm at, 32–33 self-image problem of, 42 “Shearson Mafia” at, 43 Drexel Burnham Lambert: annual report of (1985), 255 Beverly Hills headquarters of, 80 Beverly Hills Savings suit against, 116–17 bonuses paid by, 247–48 California branch opened by, 50–53 charter of, 206 Chinese wall of, 306–8 client concerns and, 65, 67, 163, 177 commitment letters used by, 107, 165–66, 182 corporate finance group of, 48–49, 63–69, 88, 98, 247, 250, 298, 302, 307 corporate finance investment partnership in, 68, 299–300 creativity of, 135 default on “highly confident” letter of, 182 ebbing power of, 333–43 “equitize” slogan at, 269 equity of, 66–67, 69–70, 246, 288–289, 306, 314 in financial scandals, 254–55 formation of, 48 franchise arrangement of, 10–11 globalization of, 243–44, 251–52 Gobhai as consultant for, 62–66, 100–101, 163, 176, 245, 296, 299, 344 as god, 244–48 Green Tree lawsuit against, 291, 292 growth of, 80, 246–47 “highly confident” letter of, 101, 106–7, 166, 167, 182, 221, 250, 251, 290, 304, 344 high-yield mutual fund of, see HITS imitators of, 248, 275 internecine rivalries in, 88, 299–301, 340–41 “Joseph doctrine” of, 170, 171 LBO group of, 100, 163 market share of, 248 medium-size companies and, 13, 49, 347–50, 357, 358 merchant banking of, 66, 248, 249–50 Milken’s title at, 84 1983 junk offerings of, 78–80 Political Action Committee of, 259 political influence of, 258–60, 264–65 principal-mindedness of, 59, 66, 67 profits of, 19, 51, 64, 80, 98, 231, 247–48 public company debate and, 69 public-relations compaign of (1987), 348–50 side deals of, 74 Special Planning Committee of, 74 stability of, 269–70 stock of, 69–70, 206, 247, 253 Third World debt project of, 254–255 3 (a) 9 deals of, 76–77, 135, 209, 331 Underwriting Assistance Committee (UAC) of, 72, 131, 235, 304–7, 351 underwriting default rate of, 77 “war chests” of, 19, 117, 163, 164, 169, 180, 185, 202 as well-rounded firm, 251–52, 253 whatever-it-takes-to-win credo of, 341 World Trade Center headquarters of, 252, 333 yin/yang of Milken operation in, 57 Drexel Firestone, 23–24, 27–31, 43, 51, 271 Drexel Harriman Ripley, 24–27 decline of, 26–27 lineage of, 26 securities-delivery system of, 25–26 Drexel High Yield Bond Conference (1979), 11–12 Drexel High Yield Bond Conference (1983), 95 Drexel High Yield Bond Conference (1984), 206 Drexel High Yield Bond Conference (1985), see Predators’ Ball (1985) Drexel High Yield Bond Conference (1986), 182–83, 257–59, 291, 302 Drexel High Yield Bond Conference (1987), 328 Dreyfus and Company, 151, 156 Dunmore Partners Ltd., 81 Duval, Albert, 156–58 DWG, 122–23, 124, 139 Eagleton, Thomas F., 171 Eckel, Lee, 259 Economic Recovery Tax Act (1981), 97 Economist, 270–71 Edersheim, Maurits, 87 EGM Partners, 300 EJ Associates, 81 Encino, Calif., 53–54, 80 encounter groups (T-groups), 62 Engel, Donald, 15, 18, 116, 117, 123, 125, 135, 183 forced resignation of, 15, 337–39, 340–42 in Japan, 243 Joseph’s reinstatement of, 338–42 Posner and, 121, 123, 338, 340 Prime Capital Associates and, 231–32 Revlon battle and, 208, 218, 220, 230, 231–32 Englewood Partners, 328 Enterprise Fund, 89 entertainment, 16, 60, 230 equity, 45, 66–67, 69–70, 156, 325 in Beatrice buyout, 250 of Drexel, 66–67, 69–70, 246, 288–289, 306, 314 Icahn’s views on, 163 in leveraged buyouts, 99, 107, 108 in National Can deal, 107, 108 Perelman’s views on, 236 in Phillips deal, 167 preferred stock as, 265 of Revlon, 216, 221, 225 risk and, 131 tax law and, 263 equity buyers, bond buyers vs., 73 ESB, 96 Evans Products, 124, 125, 128, 139 exchange offers, 66, 309–10, 312, 346 carrot-and-stick vs. buy-back, 76 registered, 75 in Revlon battle, 216–17, 224–25, 226, 228 unregistered, 75–77, 124 Executive Life, 167, 280 Exxon, 272 fallen angels (“deep-discount bonds”), 27, 38, 44, 119, 346 Farley, William, 14, 109, 135, 163, 201 Farley Industries, 17 Far West Financial Services, 168 Federal Bureau of Investigation (FBI), 72 Federal Election Campaign Act, 259 Federal Home Loan Bank Board, 92, 115, 280 Federal Reserve, 37, 211, 212, 215, 264–65, 266 Federal Savings and Loan Insurance Company, 115–16 FGIC (Financial Guarantee Insurance Company), 283 Fidelity, 47 FIFI (First Investors Fund for Income), 33, 46–47, 56 Financial Corporation of America, 131 Financial Corporation of Santa Barbara, 343 Financial Guarantee Insurance Company (FGIC), 283 Finneran, Gerald, 353 Finsbury, 277–78 Firestone Tire and Rubber Company, 27, 30 First Boston Corporation, 30, 95, 248, 250, 253, 325 First City Financial, 168 First City Properties, 168 First Executive, 83, 89–90, 92–94, 124, 272, 276, 277, 281, 311 Atlantic Capital compared with, 280 First Investors Asset Management, 94, 277 First Investors Fund for Income (FIFI), 33, 46–47, 56 First Oak Financial Corporation, 280 First Stratford, 93, 281 Fischbach, 321–24, 352 Fitzpatrick, Dennis, 115 Flagstaff, 110, 111, 112, 160 “flexible balance sheet,” 75 Flight Transportation, 72–73, 306 Flom, Joseph, 101, 122, 157, 196, 206, 208, 226 Fomon, Robert, 41 food business, 109–11 Forbes, 58, 70, 124, 155, 209, 270, 272–73, 322 Ford Motor Company, 42 Forstmann, Theodore, 222, 226 Forstmann Little and Company, 99, 219–28, 231 Fortune, 335–36 14D documents, 133 Foxfield (Icahn estate), 189, 190 Fraidin, Stephen, 319 Frates, Joseph, 195 Frates group, 195–96 fraud, 72, 199–200 Freeman, Robert, 328–29 Freilich, Joseph, 151, 152, 153, 156 Freund, James, 106, 182 Friday, John, 43 Fried, Frank, Harris, Shriver and Jacobson, 317 Friedland, Joel, 15 Fruehauf bonds, 345 Fuqua Industries, 44 Fuss, Albert, 214, 277 Future Shock (Toffler), 246 futures market, 251 Gable, Clark, 53 GAF, 181, 213, 233, 245, 275–76, 287–88 Wickes compared with, 295 Galef, Andrew, 265 gambling operations, 58–60 Gandhi, Mohandas K., 357 Gardiner, Nancy, 236 Gam-St.

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The way to reach those retail buyers, Milken and Joseph decided, was to invent high-yield-bond funds, where the portfolio would be diversified. First Investors Fund for Income (FIFI) had been operating essentially as a high-yield-bond fund since Milken began tutoring David Solomon, in the midseventies. In 1976 FIFI had asked Drexel to raise capital for it. The project had foundered for close to a year, and now, in the spring of 1977—with the new junk bonds starting to be issued—Drexel’s G. Christian Andersen and David Solomon set out on a cross-country road show to raise about $17 million. “We took the story of high-yield bonds to the masses and to Wall Street and started to acquaint people with what the performance record [of FIFI] had been,” Andersen noted.

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First he learned everything he could about the companies whose bonds he would be trading, preparing for his hours on the trading desk as though it were orals. Then he was ready to make his bet. Explaining their allure, Milken said, “The opportunity to be true to yourself in high-yield bonds is great. It is not like buying a stock. With a stock, its value is generally dependent upon investors’ collective perceptions of the future. No matter how much research you have done regarding a particular stock, you don’t have a contract as to what the future price will be. But with a high-yield bond there is a date certain in the future when it matures, and if you hold it to maturity and your analysis is correct, you will be correct in your calculation of your yield—and you do have a contract as to future price.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

In fact, because hedge fund managers make speculative investments, these funds tend to carry more risk than the overall market. 130 The Investopedia Guide to Wall Speak Related Terms: • Hedge • Margin • Short Sale • Leverage • Risk High-Yield Bond What Does High-Yield Bond Mean? A bond that has a low credit rating and thus pays out a high rate of interest. Because they have a higher risk of default than investmentgrade bonds, high-yield bonds pay a higher yield. In the two main credit rating agencies, high-yield bonds carry a rating of BBB or lower from S&P and Baa or lower from Moody’s. Bonds with ratings above these levels are considered investment-grade. Credit ratings can be as low as D (currently in default), and most bonds with C ratings or lower carry a high risk of default; to compensate for this risk, yields typically are very high.

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Credit ratings can be as low as D (currently in default), and most bonds with C ratings or lower carry a high risk of default; to compensate for this risk, yields typically are very high. Also known as junk bonds. Investopedia explains High-Yield Bond The term “junk bonds” aside, high-yield bonds are widely held by investors worldwide, although most participate through the use of mutual funds or exchange-traded funds. The yield spread between investment-grade and high-yield bonds fluctuates over time, depending on the state of the economy, as well as company- and sector-specific events. Generally, investors in high-yield bonds can expect a yield that is at least 150 to 300 basis points higher than the yield on an investment-grade bond.

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Here’s how the Standard & Poor’s rating system works: AAA and AA: high credit-quality investment grade; AA and BBB: medium credit-quality investment grade; BB, B, CCC, CC, and C: low creditquality (noninvestment grade), or “junk bonds”; D: bonds in default for nonpayment of principal and/or interest. The Investopedia Guide to Wall Speak 27 Related Terms: • Credit Rating • Interest Rate • Junk Bond • High-Yield Bond • Investment Grade Book Value What Does Book Value Mean? (1) The value at which an asset is carried on a balance sheet; in other words, the cost of an asset minus accumulated depreciation. (2) The net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. (3) The initial outlay for an investment.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

In Table 7.2, there are three periods studied, each corresponding to the period over which a bond series is available: 1951–2009: Corporate Bond Index from Morningstar 1983–2009: Barclays Capital High Yield Bond Index 1976–2009: Barclays Capital Aggregate Bond Index and Merrill Lynch Mortgage-backed Bond Index P1: a/b c07 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:47 Printer: Courier Westford 132 PORTFOLIO DESIGN TABLE 7.2 Comparisons between Medium-Term U.S. Treasuries and Other Bonds Average Return Standard Deviation Sharpe Ratio 1951–2009 Medium-Term Treasury Corporate Bond 6.2% 6.5% 5.1% 8.6% 0.29 0.21 July 1983–December 2009 Medium-Term Treasury High-yield Bond 7.7% 9.3% 5.0% 8.8% 0.62 0.53 1976–2009 Medium-Term Treasury Mortgage-Backed Bond Barclays Aggregate Bond 8.0% 8.6% 8.2% 5.8% 7.0% 5.7% 0.42 0.44 0.47 Period Data Sources: © Morningstar for Medium-Term Treasuries and Corporate Bonds.

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Chapters 5 and 6 will examine these investments and will show how they help to diversify U.S. portfolios. Fixed income investments have evolved even more than stock investments. Forty years ago, Treasury and corporate bonds were dominant in fixed income portfolios (along with municipals for taxable investors). There were high yield bonds, but those were typically “fallen angels” rather than newly issued bonds. Mortgage-backed bonds didn’t exist because securitization of mortgages was just beginning. Today, Treasuries represent less than 16 percent of the U.S. bond market and corporate bonds another 20 percent. Chapter 7 examines this modern fixed income market in detail.

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investment grade bonds, those with a BAA rating, had an average yield of 9.9 percent, so the premium over Treasuries was 2.2 percent and the premium over the highest grade corporate bonds was 1.1 percent. These premiums give some indication of the importance of default risk in the pricing of non-Treasury bonds. Default risk is of utmost importance in pricing so-called high-yield bonds. Until the 1980s, the high-yield market consisted primarily of fallen angels, bonds that were originally issued as investment grade, but that had fallen below investment grade because of poor financial performance. It was only in the 1980s that investment banks such as Drexel Burnham saw the potential for issuing non-investment grade (or junk) bonds to provide financing for firms with weaker credit standing.

Unconventional Success: A Fundamental Approach to Personal Investment
by David F. Swensen
Published 8 Aug 2005

While index-specific differences in market characteristics and period-specific influences on market returns cause the comparison to fall short of a perfect apples-to-apples standard, the 0.7 percent per annum difference between Treasury and corporate returns fails to compensate corporate bond investors for default risk, illiquidity, and optionality. U.S. government bonds provide a superior alternative. HIGH-YIELD BONDS High-yield bonds consist of corporate debt obligations that fail to meet blue chip standards, falling in rating categories below investment grade. The highest category of junk bonds carries a double-B rating, described by Moody’s as having “speculative elements,” leading to a future that “cannot be considered as well assured.”

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Treasury Index of Leibowitz, Martin L. Leverage, leveraging Leveraged buyouts: active management and and alignment of interests characteristics of domestic corporate bonds and high-yield bonds and Lewis, Michael Liberty Young Investor Fund Lipper, Inc. mutual-fund fees and mutual-fund portfolio turnover and S&P 500 Funds Index of Liquidity domestic corporate bonds and ETFs and high-yield bonds and leveraged buyouts and portfolio construction and tax-exempt bonds and U.S. Treasury bonds and Long/short investing Long Term Capital Management (LTCM) Loomis-Sayles International Equity Fund Lord Abbett McDonough, William Malaysia Managers asset-backed securities and chasing performance and co-investment by domestic corporate bonds and domestic equities and fees and market timing and relations between investors and style-based venture capital and Wells Capital, and see also active managers, active management; passive managers, passive management Marisco Focus Fund Market, markets asset-backed securities and basic investment principles and bear bull characteristics of chasing performance and contrarian behavior and core asset classes and depth of domestic corporate bonds and domestic equities and emerging markets equities and ETFs and foreign bonds and foreign developed equities and in future hedge funds and and hidden causes of poor mutual-fund performance high-yield bonds and Internet bubble and leveraged buyouts and mutual-fund failure and mutual-fund fees and mutual-fund performance deficit and mutual-fund portfolio management evaluation and mutual-fund portfolio turnover and non-core asset classes and portfolio construction and real estate and rebalancing and retirement plans and security selection and taxes and tax-exempt bonds and TIPS and U.S.

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Fixed-income alternatives dominate the population of well-defined markets that serve no valuable portfolio role. While default-free, noncallable, full-faith-and-credit obligations of the U.S. government play a basic, valuable, differentiable role in investor portfolios, investment-grade corporate bonds, high-yield bonds, foreign bonds, and asset-backed securities contain unattractive characteristics that argue against inclusion in well-constructed portfolios. Understanding the shortcomings of particular fixed-income investment alternatives, particularly in regard to how those alternatives relate to the objectives of the fixed-income asset class, helps investors in making well-informed portfolio decisions.

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation
by Sebastien Page
Published 4 Nov 2020

Our discussions often start with stocks versus bonds, or, broadly speaking, whether we want to position the portfolios “risk-on,” in which case we add to risk assets (stocks, high-yield bonds, etc.), or “risk-off,” in which case we add to more defensive asset classes (bonds, cash, etc.). Then we look for relative value opportunities at a more granular level. For example, we often ask: Are value stocks cheap relative to growth stocks? What about small versus large? Are European stocks cheap relative to US stocks? Do we like high-yield bonds relative to emerging markets bonds? While valuation is the main driver for our decisions, we account for macro factors (growth, inflation, central bank policy, geopolitical factors, etc.), index-level fundamentals (sales, earnings, margins, leverage, etc.), and technicals (sentiment, positioning, flows, momentum, etc.).

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Initial yield reaches maximum predictability (at 97% correlation) at 1.08 times duration, and it remains quite high (above 95%) for longer horizons. Importantly, the authors show that predictability is equally strong whether rates are rising or falling. They find similar (albeit slightly weaker) results for international hedged bonds. But for other asset classes, initial yield is not as predictive. Correlation for high-yield bonds peaks at 78% at 0.98 duration and hovers around 70–75% for the 1.0 to 2.0 range. For emerging markets bonds, it peaks at 89% at 1.9 duration. For unhedged international bonds, correlation peaks at 57% at 0.5 duration (here the effect of currency risk muddies the water). Harvey and Stonacek conclude that “current yields are most highly correlated with future returns for higher-quality and hedged bond indexes.

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Identify the most “extreme” of all the fundamental signals from our AAC book. 2. Rank by R-squared (predictive correlation on forward 12M returns). 3. Pick top 3 most extreme signals with high predictive correlation. The following top 3 signals surfaced: Net bank tightening is bullish on stocks vs. high yield bonds (10th percentile over 10 years). Historically, net bank tightening has had a 44% correlation with the forward relative returns on stocks vs. high yield. Valuation metrics also indicate that stocks are cheap relative to high yield (39th percentile), and momentum has been positive for stocks over the last 12 months.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

By immediately buying or selling, these bond professionals almost instantly bring the bond's price back to perceived fair value. High-Yield Bonds High-yield bonds, also known as junk bonds, appeal to many investors because of their higher yields and sometimes higher returns than their more staid bond cousins. We have not included them in our portfolios for several reasons: 1. Bonds are primarily for safety. Stocks are primarily for higher return (and risk). Junk bond funds behave somewhere between traditional high-quality bonds and stocks. This tends to muddy the important distinction between bonds and stocks in a portfolio, thereby making risk control more difficult. 2. Taxable high yield bonds are among the most tax-inefficient of all securities.

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Taxable high yield bonds are among the most tax-inefficient of all securities. By placing high-yield bond funds in retirement accounts (where they belong), there is less room for other tax-inefficient funds. 3. High-yield bond funds often have higher returns (and risk) than other bond funds. However, we believe that for investors willing to give up the safety of traditional good-quality bonds, it's more efficient (higher return per unit of risk) to invest in stocks, rather than hi-yield bonds. 4. High yield bond funds are more closely correlated to stocks. Thus, they offer less diversification benefit than do traditional bond funds.

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Fee-only advisor: A financial advisor who charges an hourly rate or charges a fee based on the percentage of assets managed. Global fund: A mutual fund that invests in both U.S. and foreign securities Hedge fund: A fund used by wealthy individuals and institutions that is allowed to use risky strategies that are not available to mutual funds. High-yield bonds: See junk bonds. International fund: A mutual fund that invests in non-U.S. securities. Junk bonds (also known as high-yield bonds): Bonds with a credit rating of BB or lower, which indicates that the bonds are considered to be below investment grade. Companies that issue junk bonds promise to pay higher yields in order to attract buyers who otherwise might purchase safer bonds.

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
by Lawrence G. Mcdonald and Patrick Robinson
Published 21 Jul 2009

On Monday the twenty-sixth, a further loss of 256 points from its high left the industrial index at 12,724, around 1,300 points below its peak. Bond prices were also crashing. It was the worst month in the history of the Lehman High-Yield Bond Index. (High-yield bonds back in June had been trading at an all-time low of only 231 basis points over Treasuries. They were now blowing out and yielding more than 500 over Treasuries. High-yield bonds were once again high-yield.) There were two distinct schools of thought about this. Some people believed this was the start of something truly awful, since it had been the worst month in the history of the credit markets.

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There was, of course, not the slightest use in putting savings in a bank. Yields were so low that the money might as well have been under the mattress. Better to put it on a couple of short-priced favorites at Belmont Park. Better yet, buy high-yield bonds. In those months around the summer and fall of 2003, high-yield started to become once again a mantra for American investors. Especially high-yield bonds, because those little darlings had the advantage of hewing to sound business practice and providing important protection for the investors. (This is inclined to be absent with beaten favorites at Belmont.) Greenspan, in some quarters, was a national hero because his actions essentially provided people with free money, with hardly any interest to pay on funds borrowed at 1 percent.

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Mark Walsh was still spending money as if it had gone out of style, Lehman was still obligated to buy thunderous wads of shaky mortgages, all our short positions were going the wrong way, and the corporate bond prices were following the Dow upward. Amazingly, the Lehman Brothers high-yield bond index ground to its all-time tight credit spread of 231 basis points over U.S. Treasuries. That’s under 7 percent for a high-yield bond! Blackstone’s initial public offering took place on June 22 and netted two enormous fortunes, one for Pete Peterson, and one for the CEO, Stephen Schwarzman. They received the bulk of the $4 billion raised in equity—Schwarzman sold shares worth $700 million, and the now eighty-one-year-old Peterson collected $1.8 billion in that single day.

Damsel in Distressed: My Life in the Golden Age of Hedge Funds
by Dominique Mielle
Published 6 Sep 2021

Today, there are innumerable types of hedge funds: equity (long/short, long, activist); emerging markets; event-driven; macro; convertible arbitrage; merger arbitrage; fixed-income arbitrage; macro; distressed; and the list goes on. Canyon combines a number of these strategies, but with deep roots in high-yield bonds and distressed investing—that’s what I did, sitting in my office, a glorified nomenclature for a sad little cubicle at first, turning a decade later into a plushy furnished suite with a view—rather than standing at a bank window, bless my grandfather. Distressed investing and high-yield bonds used to be called, before we polished the terminology, vulture investing and junk bonds. I resented the ugly bird and garbage analogies as truly lacking any glamour.

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Companies have a funny way of going through phases, much like people. They grow, they mature, they partner up in a merger, they fail and re-emerge, and they age with various degrees of grace. Each phase provides an opportunity for trades and profits under different investment strategies. In Nextel’s case, those phases included high-yield bonds as the company financed its growth, risk arbitrage when it merged with Sprint, and distressed investing as Nextel International, which was divested in the acquisition, filed for bankruptcy…twice, and was finally sold in pieces. Building knowledge of a company and understanding its life cycles brings an immense competitive advantage to an investor.

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I regarded them simply as good opportunities to plant a flag of determination and mark my territory in a male-dominated, competitive environment. The first occurred over a telecom trade within the first two years of my employment. I covered the wireless industry when it was in its infancy, and I was convinced I had uncovered a gem in the high-yield bonds of American Tower, an intriguing new company that owned and operated a few thousand cell phone towers. As wireless service became popular in the late ’90s and picked up subscribers, telecom operators added geographic coverage, which required building more towers to support their network and transmit the cell signals.

Two and Twenty: How the Masters of Private Equity Always Win
by Sachin Khajuria
Published 13 Jun 2022

Of course, the assets will be managed on arm’s-length terms and will be subject to approval by the target’s new board. This board will be appointed by and composed of the deal team plus independent non-executives chosen by the Firm. What else can be done with the target? General Insurance is debt-free, and so the deal team looks at a creative way of issuing a high-yield bond. This is a novel strategy within the insurance industry, which is generally averse to low-grade credit. However, now is the time to strike, as interest rates are close to zero and debt investors are desperate for yield, even if only some of the interest is paid in cash. Rolling up half of the interest payments as a promise to pay the debt investors in the future (“payment-in-kind” interest) means passing some of this debt obligation on to the next owner of the business many years from now.

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The next owners of a business targeted by private equity, whether the public markets or another private equity fund or a corporate buyer, are unlikely to pay up for a target that has been window-dressed. Those buyers will quantify the operational and financial progress made during the ownership by private equity, and they are not going to be persuaded if the only work done was to issue high-yield bonds, cut costs, and pay out dividends. For the masters of private equity, there is no fixed formula. Rather, to be successful, the investment professionals must stay focused on the band of returns that each deal should make as compensation for its risks—and pivot the company as an instrument to achieve this goal.

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Then, to gain further ground, to nail the interview, he reveals part of the endgame: We are in the tenth year of an economic upcycle, setting aside the shock of the pandemic. Interest rates are low, and our investors require yield to service their obligations. The credit markets are frothy; even high-yield bonds are now issued at an interest rate of only five percent and do not offer investors much protection if the investment goes wrong. There is a worldwide search for yield. We aim to maintain our discipline and buy assets that are highly likely to both return our investors’ money and make a return on their money.

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future
by Andy Bell
Published 12 Sep 2013

The first decades of the 20th century saw an increase in the issue of corporate bonds. These early issues were mainly investment-grade bonds, with appetite for junk bonds verging on the non-existent. The modern market in non-investment grade, or high-yield bonds, really took off after the financial crisis of the 1970s, when falling asset prices led to banks lending only to those companies with a strong credit rating. The 1980s saw high-yield bonds delivering excellent returns without the increased levels of defaults their yields suggested, attracting increasing numbers of investors to the asset class. In the USA, yields through the 1980s averaged 14.5 per cent, while default rates averaged just 2.2 per cent.

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High-yield/junk bonds Anything rated below these levels is considered a high-yield or junk bond. These bonds, as you might have guessed, pay higher yields, but the chance of them going bust is also far higher. Furthermore, ratings agencies can downgrade high-yield bonds further, meaning their resale value will fall. The only way you should be investing in junk bonds as a DIY investor is through a high-yield bond fund, unless you really know what you are doing. table 13.1 Understanding ratings agency classifications Gilts In the more than 300 years since it was established, the Bank of England has never defaulted on any of its liabilities.

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Back in October 2008 corporate bond prices had fallen so far that, for anyone holding a basket of stocks, at least a third of investment-grade issuers would have had to go bust over the next five years before investing in government bonds would have delivered a better return. In other words, one in three major companies in the UK would have had to be wiped out in a financial collapse greater than the Wall Street Crash of 1929. The fear that stalked investors back in 2008 meant that the Investment Management Association sterling high-yield bond sector, which tracks riskier bonds, saw an average fall of 25 per cent in 2008. But when the world didn’t completely melt down, the rebound in 2009 was 48 per cent. Concerns over corporate bond defaults became much more muted as corporate Britain accumulated stockpiles of cash having pulled in its horns and trimmed its operating expenses.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

Cole, “Pantry Pride Revlon Bid Raised by $1.75 a Share,” New York Times, October 19, 1985, accessed March 17, 2015, http://www.nytimes.com/1985/10/19/business/pantry-pride-revlon-bid-raised-by-1.75-a-share.html. 21. Paul Asquith, David W. Mullins Jr., and Eric D. Wolff, “Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges and Calls,” Journal of Finance 44, no. 4 (1989): 924. 22. Bruck, The Predators’ Ball, p. 76. 23. Asquith, Mullins, and Wolff, “Original Issue High Yield Bonds,” p. 929, table 2: weighted average of first four numbers in right-hand column. 24. Ibid. Number of successful exchanges that have defaulted (16, in table 7, p. 935) on new issuances from 1977 to 1980 divided by new issuances from 1977 to 1980 (155, in table 1, p. 928). 25.

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In a distinguished paper, Paul Asquith of MIT, and David Mullins and Eric Wolff of Harvard Business School, showed that almost 30 percent of the new junk bonds issued in 1977 through 198023 had defaulted by the end of 1988; this included 10 percent that were involved in exchanges, but then had subsequently defaulted.24 In the early to mid-1980s the Milken scheme was developing epidemically. In March every year, Drexel would throw Milken’s annual High-Yield Bond Conference. By 1985 this gala had earned the name Predators’ Ball; it attracted 1,500 comers to the Beverly Hilton and nearby Beverly Hotel.25 Those financiers had the potential of trillions of dollars—their own and junk-financed—to throw into hostile takeovers. The junk-bond business was thriving so well that, for 1986, Drexel gave Milken’s trading group—which had moved from New York to Los Angeles in 1978—$700 million in bonuses.

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New Evidence from Recent Disclosure Rule Changes” (September 23, 2014), p. 23, accessed May 27, 2015, http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2500054. 4. W. Braddock Hickman, Corporate Bond Quality and Investor Experience (Princeton: National Bureau of Economic Research and Princeton University Press, 1958). Table 1 is on p. 10. 5. George Anders and Constance Mitchell, “Junk King’s Legacy: Milken Sales Pitch on High-Yield Bonds Is Contradicted by Data,” Wall Street Journal, November 20, 1990, p. A1. 6. Lindley B. Richert, “One Man’s Junk Is Another’s Bonanza in the Bond Market,” Wall Street Journal, March 27, 1975. 7. John Locke, An Essay Concerning Human Understanding, 30th ed. (London: William Tegg, 1849): “I endeavour as much as I can, to deliver myself from those fallacies, which we are apt to put upon our selves, by taking words for things” (p. 104). 8.

Investing Demystified: How to Invest Without Speculation and Sleepless Nights
by Lars Kroijer
Published 5 Sep 2013

At the time of writing, the yield to redemption for the Finra/Bloomberg US investment grade and high-yield indices were as follows (www.bloomberg.com/markets/rates-bonds/corporate-bonds): Current yield US investment grade 3.13% US high yield 5.65% For government bonds, we saw earlier what the yield on a 10-year bond was for various ‘risky’ countries. But as was the case with those government bonds we can’t simply deduce from the data above that high-yield bonds always will do better than investment grade ones. The high-yield bonds are likely to have a much higher default rate (just like higher-yielding government bonds will default more often), and the return net of those defaults will be lower than in the unlikely case where all the high-yielding bonds are repaid in full. Return expectations of the rational portfolio Below are some estimates for returns of the various asset classes we have discussed so far in this book.

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There was a belief that whatever happened, the bonds would be repaid at maturity, while nobody knew what would happen to equities. The large decline in the Barclays US High Yield index in 2008 was no surprise. Companies with high-yield bonds outstanding were dependent on a benign economic environment to repay their debts. With a collapsing market and grim forecasts as a result of the crash, those future repayments were put in doubt and investors sold high-yield bonds as a result. Table 7.2 Various bond indices performance 2002–12 (%) Generally, I would caution investors about reading too much from this short data period. There is no saying that future crises or correlations will be like those of the past.

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At this time, around 55% of the world’s corporate bonds are non-US, and like the US ones represent thousands of individual bonds of different maturities, industries, geographic areas and credit qualities. Ignoring the great diversification benefits from adding index-tracking ETFs or funds made up of these many thousand foreign bonds to your rational portfolio would be an omission. Figure 7.10 Placement in the capital structure It makes sense that while there are very high-yielding bonds, in general return expectations from bonds are lower than equities. As a bond holder you are a lender – to either a corporation or government – whereas as an equity holder you are an owner. The seniority of the capital structure reflects this. In receiving the distribution of the cash flows of a company the debt holders are entitled to their interest payments before dividends are paid to equity holders.

Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen , Michael Prahl and Bowen White
Published 15 Jun 2017

In addition to the terms listed above, mezzanine loans may offer additional upside to lenders by employing an “equity kicker” through a convertible debt feature or attached warrants.3 These “kickers” are typically included to increase the return profile of an issue and in turn attract investor participation in the offering. High yield bonds: High yield bonds are marketed and sold in the public debt market. Unlike senior and mezzanine financing, high yield bond issuance is tightly regulated and typically requires a rating, listing on a stock exchange and reporting throughout the life of the bond.4 Due to the rules and regulations governing the marketing and sale of securities to public investors, issuing high yield bonds can be a lengthy process relative to private debt placements; as a result, these bonds are often used to replace bridge loans or other short-term debt after a buyout transaction has closed.5 As the listing process and ongoing obligations associated with this debt can be timely and expensive, PE firms expect to pay lower interest rates than for mezzanine and other forms of junior debt.

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Throughout the 1970s and for most of the 1980s, we had lived in a US and venture-centric world. Now, the buyout business was emerging as a new practice within the world of private equity. Pioneered by KKR, CD&R and a handful of other firms, the use of leverage to buy and manage a company was a new idea. The development of the high yield bond market, led by Michael Milken of Drexel Burnham Lambert, made this practically possible on a much wider scale than previously thought. Heretofore, “junk bonds” were formerly high grade bonds of companies that got into trouble and were in or likely to be in default. The idea of a new issue “junk bond” was a new concept.

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Senior debt is often raised in multiple tranches, one of which is amortized through annual repayments (with any balance due at the end of the loan’s term); the remaining tranches are repaid in a single bullet payment at maturity. JUNIOR DEBT: Junior debt accounts for the remaining debt capital in a buyout; the most common forms are mezzanine financing raised in the private institutional market and high-yield bonds raised from the public bond markets. This layer of debt is unsecured and subordinated to senior debt in the event of bankruptcy. Junior debt instruments have longer maturities than senior debt (eight to ten years), pay annual cash interest and may in some cases accrue additional non-cash interest; they are typically repaid via a single bullet payment at the end of the term.

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

They find only mild pricing of liquidity factors on average—worth about 10 bp for IG bonds and 30 bp for high-yield bonds. However, when they specify a regime-switching model, they find that liquidity betas vary sharply between normal and stress regimes for high-yield bonds—but not for IG bonds. The stress regime probability was often high between 1973 and 1981 as well as in 1989–1990 and 2002–2003 (loosely coinciding with recessions and equity bear markets). Estimated risk premia for liquidity factors are much higher in stress regimes (about 100 bp for high-yield bonds) while premia for bond market factors are stable across regimes. These results are consistent with episodic liquidity premia.

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Overall, the key explanatory variables for corporate spreads include• liquidity premium proxies and Treasury scarcity measures; • cyclical indicators; • (equity and spread) volatility measures; and • default rates. Different aspects dominate the determination of spreads for top-rated credits, most IG corporates, and high-yield bonds:(i) For top-rated (AAA/AA) credits, the default probability is minimal, and even downgrading bias appears to be a small part of the yield spread. The ratio of yield spread to expected credit losses is very high (>5) for top-rated bonds, and modest (<2) for high-yield bonds. In contrast, liquidity, tax, and systemic factors dominate. Top-rated bonds are more exposed to (rare but toxic) systemic risks and less to easily diversifiable idiosyncratic default risks.

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Structural credit models imply a negative relation because corporate bonds are effectively short the volatility of the firm’s assets. Short options embedded in callable bonds exacerbate this feature. The negative relation between changes in yield levels and corporate spreads is consistent with this story. (iii) High-yield bonds When defaults matter High-yield bond market performance is primarily driven by changing default rates (see Figure 10.11) that tend to cluster, peaking near economy-wide recessions. Default rates are backward looking while rating changes suffer from inertia, so it is no wonder that HY spreads lead both modestly.

Work Less, Live More: The Way to Semi-Retirement
by Robert Clyatt
Published 28 Sep 2007

Its uniqueness makes it attractive—and fortunately, Vanguard has a good low-cost fund: High Yield Corporate (VWEHX). This fund will move differently from other high yield funds in that it invests in only the highest quality high yield bonds and thus underperforms the high yield index in the good years. But it has nowhere near the credit risk and defaults in the tough years—and there are tough years in the high yield bond segment. Hold high yield in tax-advantaged accounts if possible to reduce taxable income. GNMA Bonds GNMA Bonds are issued by the Government National Mortgage Association, an agency of the U.S. government, and as such are considered to have creditworthiness comparable to U.S.

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Stock Market Index contains just under 7% small stocks, then a portfolio that contained more than 7% small stocks—for instance, the Rational Investing portfolio, in which small stocks make up over 18% of the total value of the stock holdings—would be considered to be tilted toward small stocks. The Rational Investing portfolio tilts toward value stocks, international assets, and small stocks. The value tilt is justified by reliable academic studies showing that value stocks and value bonds—high yield bonds—outperform the overall market over time due to their higher risk. Holding these risky assets in funds, within an overall portfolio, means the rewards can be gained while keeping the risk manageable. International stocks and bonds as well as small stocks are also attractive asset classes to tilt toward, since their low correlations with other asset classes means they can dampen overall portfolio risk while delivering good returns.

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Small Stocks 8.50% 13.81 17.79 International Large Stocks 5% 6.10 16.14 International Small Stocks 10% 6.91 17.86 6.50% 12.33 26.00 Short-Term Corporate Bonds 4% 7.25 2.59 Long U.S. Government Bonds 4% 8.83 7.83 Medium-Term U.S. Bonds 10% 7.00 4.65 International Bonds 12% 7.31 7.95 GNMA Bonds 5% 7.39 3.98 High Yield Bonds 4% 7.64 7.11 Oil and Gas 3% 15.48 16.32 Market Neutral Hedge Funds 2% 10.31 5.63 Commodities 4% 9.90 21.91 Commercial Real Estate 5% 13.45 14.08 Venture Capital/Private Equity 5% 14.18 17.56 Asset Classes Emerging Market Stocks 100% Source: Advisory World, Inc. 194 | Work Less, Live More Portfolio performance The table below shows annual performance since 1988 of the Rational Investing portfolio versus the S&P 500 and a 60/40 blend of the S&P 500 and one-month U.S.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

In sum, this is a case that is better analyzed with a full and flexible Expected Utility analysis. We should expect to find that the optimal allocation to these short‐term, high‐yield bonds is much lower than would be suggested by only considering their expected gain and standard deviation of returns. Some Clarity on Risk Parity Staying with the high‐yield bond example, let's assume that the stock market has twice the excess expected return as the high‐yield bonds, and also twice the standard deviation, so they both have the same Sharpe ratio. We've seen that just because high‐yield bonds and stocks have a similar Sharpe ratio doesn't mean a whole lot when it comes to our optimal allocations because the shape of their return patterns is so different.

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Table 6.3 Three Investments with Same Expected Gain and Risk but Varying Symmetry of Payoffs Positively Asymmetric Symmetric Negatively Asymmetric Probability of Profit 20% 50% 80% Probability of Loss 80% 50% 20% Profit 45% 25% 15% Loss –5% –15% –35% Expected Gain 5% 5% 5% Risk 20% 20% 20% Sharpe Ratio 0.25 0.25 0.25 Exhibit 6.5 Impact of Investment Symmetry on Risk‐adjusted Return Many investments have return patterns that are significantly different from the normal return distributions that we have been focused on so far. For example, short‐term, high‐yielding bonds may seem appealing to investors if they don't look beyond summary metrics of return and risk. These bonds are often viewed as unlikely to default, don't come with a lot of daily market risk, and in normal times offer a yield 3% to 5% above safe assets such as Treasuries with similar maturities.l For investors who feel that equities will generate relatively meager returns, these bonds may appear to provide a lower‐risk alternative with ample excess return.

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We've seen that focusing on the median of a distribution is useful in deciding how much to bet on a coin flip, but the return pattern of these bonds is very negatively asymmetric as compared to the coin flip situations we've been discussing. When thinking fast and intuitively, we all have a well‐documented tendency to put too much weight on highly likely “headline” outcomes—while ignoring the outcomes that are very unlikely but extreme.4 We are apt to see the promised extra return of a high‐yield bond as the expected return, effectively setting to zero the probability of loss from default. From this perspective, you might decide on a pretty large allocation to these bonds, a strategy that is sometimes described as “picking up nickels in front of a steamroller.” Of course, we know there's no such thing as a free lunch; bonds promising an extra 3%–5% can't be risk‐free.

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

In almost any kind of investing, returns have at least some (if not a mathematically exact) connection to the risk-free rate of return, with investors demanding higher returns for greater risk. The premium that investors demand for high yield bonds over the safety of Fed Funds offers a good snapshot for the market’s appetite for risk, as seen in this two-decade survey: ARE YOU GETTING PAID TO TAKE RISK? A two-decade survey of the spread between the Merrill Lynch High Yield (MLHY) Index and the Fed Funds Rate. When the spread is high, high yield bonds are said to be cheap. The chart shows this spread over time by subtracting the risk-free Fed Funds rate from the riskier Merrill Lynch High Yield (MLHY) Index.

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There was no way to avoid uncertainty regarding the rate at which interest payments could be reinvested because zero-coupon bonds had not been invented. Bonds rated below investment grade couldn’t be issued as such, and the fallen angels that were outstanding had yet to be labeled “junk” or “high yield” bonds. Of course, there were no leveraged loans, residential mortgage–backed securities (RMBSs), or collateralized bond, debt, and loan obligations. And today’s bond professionals might give some thought to how their predecessors arrived at yields to maturity before the existence of computers, calculators, or Bloomberg terminals.

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For if the second mortgage is unsafe the company itself is weak, and generally speaking there can be no high-grade obligations of a weak enterprise. (p. 148) Bonds of smaller industrial companies are not well qualified for consideration as fixed-value investments. (p. 161) When I began to manage high yield bonds in 1978, most institutional portfolios were governed by rules that limited bond holdings to either “investment grade” (triple B or better) or “A or better.” Rules like these that put certain securities off-limits to most buyers had the effect of making bargains available to those of us who weren’t so restricted.

How Money Became Dangerous
by Christopher Varelas
Published 15 Oct 2019

The crowd set down their hot dogs and beers and applauded him warmly. After serving two years in prison on multiple felony convictions, he had reinvented himself as a philanthropist, and even his once infamous history as the Junk Bond King was now celebrated. Except that nowadays, no one says junk bond. The accepted term is high-yield bond. So Michael Milken is again a hero, junk bonds are high-yield bonds, and corporate raiders have become activist investors. This signals a major evolution in American business, from the time of Steinberg’s attack on Disney through to the current day. While these activist investors can certainly bring about positive results, one unfortunate consequence is that management teams have become laser-focused on the bottom line—and, in particular, the short-term bottom line—often at the expense of investing in and creating the best product three or five years from now.

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I thanked him and enthusiastically dove into my directive from senior command, only to find that the report was written in German, a language I didn’t know. I glanced at Gutfreund, hoping to find him smiling good-naturedly at the prank, but he had already turned away. Meanwhile, my supervisor had given me an assignment to document the terms of all past issuances in the high-yield bond market. I wasn’t yet sure what that meant, but I gladly accepted the assignment, as it allowed me to interact with a few of the high-yield traders. One asked me what crime I had committed to be stationed in the DMZ, referencing the demilitarized zone between the hostile forces of Gutfreund and Meriwether.

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Milken recognized that if someone were to focus on the outcasts that most of Wall Street didn’t want to touch, then the higher fees from issuing and trading those bonds, which were considered riskier, could bring great profits. That was the idea that Milken brought to Drexel and, through the 1970s, put into practice, forging an explosively powerful market around these high-yield bonds, commonly called junk bonds. Drexel became a major player on Wall Street, as Milken parlayed his junk bonds into supporting another booming market—mergers and acquisitions. His ability to access capital from the new market he created grew so deep and his connections so vast that he developed the ability to rapidly assemble armies of corporate raiders who could target any struggling company, no matter the size, backed by his junk bond war chest.

Financial Statement Analysis: A Practitioner's Guide
by Martin S. Fridson and Fernando Alvarez
Published 31 May 2011

Every high-risk company seeking a loan can make a plausible soft case for overriding the financial ratios. In aggregate, though, a large percentage of such borrowers will fail, proving that many of their seemingly valid qualitative arguments were specious. This unsentimental truth was driven home by a massive 1989–1991 wave of defaults on high-yield bonds that had been marketed on the strength of supposedly valuable assets not reflected on the issuers’ balance sheets. Bond investors had been told that the bold dreams and ambitions of management would suffice to keep the companies solvent. Another large default wave in 2001 involved early-stage telecommunications ventures for which there was scarcely any financial data from which to calculate ratios.

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“It smelled bad,” he confided.30 Suspiciously high profitability constituted a danger sign to some observers. A Milan banker noted that a very well-managed company in Parmalat's business would achieve an operating margin of 6 to 7 percent, yet Parmalat was reporting 12 percent.31 Lack of transparency in financial reporting was another warning. “Parmalat was an ‘avoid’ recommendation,” said BarCap high yield bond analyst Robert Jones. “There simply wasn't enough information to form a fundamental credit view.”32 Not everybody steered clear, however. “Everyone who did their research knew this wasn't the cleanest company,” commented RBS consumer products analyst Rob Orman, “but many people looked at the spread33 and thought, how far wrong can you go with a dairy company?”

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Notwithstanding the many uncertainties that confront the financial forecaster, carefully constructed projections can prove fairly accurate. The results can be satisfying even when the numbers are strongly influenced by hard-to-predict economic variables. The two detailed projections reproduced as Exhibits 12.16 through 12.23 were generated by independent high-yield bond analyst Stan Manoukian. These exhibits show how the bottom-up approach illustrated in the fictitious Colossal Chemical example can be applied in real life to companies outside the basic industry sphere. Exhibit 12.16 Dex One Corporation: Historical and Near-Term Projected Data Dex One provides print, online, and mobile search marketing.

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present
by Jeff Madrick
Published 11 Jun 2012

He thought he knew what the others did not, that analyzing high-yield bonds was a surer way to make profits than the stock market. As he later told financial writer Connie Bruck: The opportunity to be true to yourself in high-yield bonds is great. It is not like buying a stock. With a stock, its value is generally dependent upon investors’ collective perceptions of the future. No matter how much research you have done regarding a particular stock, you don’t have a contract as to what the future price will be. But with a high yield bond there is a date certain in the future when it matures, and if you hold it to maturity and your analysis is correct, you will be correct in your calculation of your yield—and you do have a contract as to future price.

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Eventually he did do the paper, but he had also discovered additional research at Wharton that he believed corroborated his idea that high-yield bonds were regularly undervalued, and he used the studies as sales tools. Milken had taken a job while still at Wharton with a white-shoe Philadelphia firm, Drexel Harriman Ripley, which once had ties to J.P. Morgan. There were few employees of Jewish descent at the firm, and none who wanted to have anything to do with the arcane and disreputable universe of high-yield bonds. While working part-time, Milken impressed his superiors with his moneymaking abilities and was offered a full-time job in 1970.

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The cash flow of these companies often had fallen sharply and existing bondholders were uncertain they would receive interest and principal. Some of the companies had defaulted on the debt, driving the prices down. The yields on these bonds rose—the interest rate paid as a percentage of the cost of the bond—to levels that were much higher than on the bonds of more solid companies, and became known generically as high-yield bonds. The ratings agencies usually downgraded these bonds from “investment grade” to “speculative”—from triple-A or double-A to below triple-B. The young Milken believed that investors systematically exaggerated the risk of default by selling the bonds too quickly when the companies ran into difficult times.

The New Science of Asset Allocation: Risk Management in a Multi-Asset World
by Thomas Schneeweis , Garry B. Crowder and Hossein Kazemi
Published 8 Mar 2010

. ■ Positive Experience: Positive experiences with different asset classes in the past increase the willingness to take new risks (i.e., invest in unfamiliar asset classes). 119 Core and Satellite Investment: Market/Manager Based Alternatives BarCap US Corporate High-Yield Private Equity Index SPDR Barclays Capital High Yield Bond ETF S&P GSCI FTSE NAREIT ALL REITS CISDM EW HF Index CISDM CTA EW Index PowerShares Listed Private Equity Portfolio iShares S&P GSCI Commodity Indexed Trust iShares FTSE NAREIT Real Estate 50 Index Fund HF Replication CTA Replication 0.95 0.94 0.99 0.99 0.94 Lipper HI Cur Yld Bd Private Equity MF Lipper Nat Res Fd IX Lipper Real Estate Fd HF Investable (Mgr.

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The general form of a multi-factor is: Rit − Rf = α i + βi1F1t + βi 2 F2t + … + βiK FKt + ε it where Rit Rf αi βi1 εit Fkt = = = = = = Total return on asset class i in time period t, Riskless rate Intercept Exposure of the investment to factor 1 Unexplained part of return Factor representing the source of risk The factors must be selected carefully so that they unambiguously represent a unique source of risk. For example, credit risk can be expressed as the difference between the return on a high-yield bond index and the return on a Treasury Bond index with the same duration, or interest rate Risk Budgeting and Asset Allocation 199 risk can be measured as the return differential between an index of mediumterm Treasuries and short-term Treasuries. Generally, as you can see, one should attempt to represent the factors as excess returns on portfolios.

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The issues related to estimating risk premiums associated with various factors were discussed in previous chapters. Briefly, for those risk factors that are represented by returns on traded assets, the risk premium associated with risk factors can be estimated by examining the excess return on the corresponding asset. For instance, the mean of the return differential between a high-yield bond index and Treasury index of the same duration is a reasonable estimate of the price of credit risk. If no such an asset can be identified, then the procedure discussed in Chapter 2 should be followed; that is, create a portfolio with high exposure to the factor and a portfolio with low exposure to the same factor.

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire
by Adam Zoia and Aaron Finkel
Published 8 Feb 2008

Note: This is primarily an equity-based style. Fixed Income Strategies There are many different fixed income funds that invest in various types of debt instruments, including mortgage-backed securities (MBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), convertible bonds, high-yield bonds, municipal bonds, corporate bonds, and different types of global securities. There are diversified funds that may invest in a combination of these securities and also arbitrage funds that seek to profit by exploiting pricing inefficiencies between related fixed income securities while neutralizing exposure to interest rate risk.

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He first encountered hedge funds through a summer position. ■■■ I got a taste for hedge funds through an internship during the summer before my senior year of college. I was fortunate to get the interview for this position through some personal contacts I had. This was a small fund with a niche focus investing in smallcap high-yield bonds and distressed debt. If I had wanted to come back and work at this fund after graduation they probably would have hired me, but honestly, I don’t think I would have been ready to work full-time at a hedge fund. As an intern I was fine, but I thought I would be better off getting banking experience.

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. • International and domestic bonds. • Credit derivatives. • Equity swaps. • Understanding of DTC and DTCC settlement. Search 3: Loan Operations Associate Description The position would allow a successful candidate to become completely knowledgeable about the operational aspects of the leveraged loan and high-yield bond markets, as well as about securitized investment vehicles (CLOs/CDOs). Familiarity with syndicated loans and a working knowledge of Wall Street Office (WSO) (or comparable loan administration software) would be ideal but are not expressly required. Responsibilities • Coordinate the execution and settlement of all trades and reconcile all trade breaks with counterparties. • Update systems and Excel spreadsheets with investment/cash activity (i.e., interest and principal payments, rollovers, rate resets, new borrowings, restructurings, etc.). • Reconcile cash accounts with trustee and prepare daily cash reports. • Analyze and summarize all investment restructurings/refinancings. • Resolve any bank reconciliation/safekeeping differences. • Conduct extensive interaction with finance team, investment team, and outside counsel. • Address all inquiries/requests within a reasonable time frame. • Perform periodic compliance testing.

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures
by Frank J. Fabozzi
Published 25 Feb 2008

The model presented in this illustration was developed by Fridson Vision.257 The unit of observation is a corporate bond issuer at a given point in time. The bonds in the study are all high-yield corporate bonds. A high-yield bond, also called a noninvestment grade bond or junk bond, is one that has a credit rating below Ba (referred to as being minimum investment grade) as assigned by the rating agencies. Within the high-yield bond sector of the corporate bond market there are different degrees of credit risk. Specifically, there are bonds classified as low grade, very speculative grade, substantial risk, very poor quality, and default (or imminent default).

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In both classifications, credit risk increases from lowest to highest. The letters D and C mean that the bond issue is in payment default. Bonds with ratings AAA to BBB (Aaa to Baa) are considered investment-grade bonds. Bonds with lower ratings are speculative-grade bonds, also commonly referred to as high-yield bonds or junk bonds. TABLE 15.2 Credit Migration Table In 5th Year At Issuance Investment Grade Speculative Grade In Default Investment Grade 94.7% 5% 0.3% Speculative Grade 1.2% 87.5% 11.3% In Default 0% 0% 0% Credit ratings can change during the lives of bond issues. Credit risk specialists use the so-called “credit migration tables” to describe the probabilities that bond issues’ ratings change in a given period.

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The second column and seventh column show the yield spread for November 28, 2005 and June 6, 2005, respectively. Look now at the third and eighth columns. This is where we begin to use the dummy variable. Since we are interested in testing if there is a differential impact on the yield spread between the two categories of high-yield bonds, there is a zero or one in these two columns depending on if the bond issue has a credit rating of CCC+ and below, in which case a one is assigned, and zero otherwise. TABLE 21.3 Regression Data for the Bond Spread Application: 11/28/2005 and 06/06/2005 Let’s first estimate the regression equation for the fully pooled data, that is, all data without any distinction by credit rating and date.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

After talking with other deal makers, the risk arbs would alert our investment bank to where the next opportunity or threat would be. In the fall of 1987, the list of potential takeovers seemed endless: USG Corporation, Tenneco, Gillette, Newmont Mining, and Santa Fe Southern Pacific, to name a few. The weapons for takeovers were high-yield bonds, which provided the capital for a raider to make a run on a company. The payoff as often as not was greenmail, a payment made in essence to buy off 15 ccc_demon_007-032_ch02.qxd 2/13/07 A DEMON 1:44 PM OF Page 16 OUR OWN DESIGN the attacker. The tactic was more akin to institutionalized extortion than anything else, but in the perspective of the times it seemed mostly mildly entertaining.

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Turn up the heat even more and the atoms themselves are melded into plasma, positively charged ions and negatively charged free electrons: matter in its most uniform and nondifferentiated state, no longer hydrogen atoms and oxygen atoms, just a seething white-hot blur of matter. 25 ccc_demon_007-032_ch02.qxd 2/13/07 A DEMON 1:44 PM OF Page 26 OUR OWN DESIGN Just as high-energy physics creates a state that is no more differentiable than to say that it is matter, so the high energy in the financial markets created a world where securities were no more differentiable than that they contained risk.4 This melding even extended beyond stocks. High-yield bonds, which usually tracked fairly closely to Treasury bonds, suddenly became simply high-risk bonds and traded just like stocks. Meanwhile, Treasury bonds, the antimatter of the world of risk, were grabbed in the flight to quality and traded up in price. This behavior demonstrates a characteristic I have observed and expounded repeatedly: As the market moves into crisis, the absolute value of the correlation of assets approaches one.

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In any case, the options Palmedo had bought a few weeks earlier for pennies had now grown in value to $20 to $30 each. When the dust settled at the end of the week, Palmedo, at age 27, made his farewells and retired to Sun Valley, Idaho, with his family and $7 million in profits. The surprise for Morgan Stanley was that our biggest losses came not from equities, but from high-yield bonds. The flight to quality moved investments away from equities into Treasury bonds, with the result that as equity prices declined, bond prices shot upward. In the aftermath of October 19, the interest rate on 90-day Treasury bills dropped almost two percentage points to just over 5 percent, and the benchmark 30-year Treasury bond shot up by more than 11 points.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

For example, many equity hedge funds routinely maintain significant net long positions, and hence their returns will be highly dependent on the direction of the equity market. Many credit hedge funds will typically assume credit risk, and for these managers, the direction of credit spreads—that is, whether the premium of high yield bonds (or other credit instruments) to U.S. Treasuries is widening or narrowing—may be the dominant determinant of performance results. In regard to CTAs, a majority of managers pursue trend-following strategies. These managers will tend to do well when markets exhibit extended trends and will do especially poorly when markets are gyrating back and forth—price action that will lead to many false trend signals and what are called whipsaw losses.

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By providing a statistically based worst-case risk measure, VaR may induce unwarranted complacency in investors regarding the risk in their portfolios. In this sense, an overreliance on VaR as a risk gauge may be more dangerous than not using any risk measurement at all. Asset Risk: Why Appearances May Be Deceiving, or Price Matters Consider an example of two hedge funds both of which utilize long/short strategies in high yield bonds and hedge to neutralize interest rate risk. Which fund portfolio seems riskier? 1. Hedge Fund A: long high-rated corporate bonds/short low-rated corporate bonds. 2. Hedge Fund B: long low-rated corporate bonds/short high-rated corporate bonds. Although it sounds as if portfolio B has much higher risk, the reverse might be true: A short position in a high-rated bond has very little risk because the potential for a further decline in the credit spread is very limited (that is, the upside price scope is limited), while the potential risk in a long high-rated bond can be substantial if the company is vulnerable to a credit downgrade.

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By using leverage, the profits from this differential can be multiplied. Leverage will always increase net interest income return, but may result in either greater capital gains or larger capital losses, depending on whether credit spreads are narrowing or widening. During 2003 to mid-2007, credit spreads on high yield bonds steadily narrowed, meaning that capital gains enhanced net interest income. Managers with the most leverage and credit exposure did best as leverage multiplied both interest income flow and capital gains (due to contracting spreads). The greater risk assumed by increased leverage would not have been evident because there were no episodes of a sharp expansion in credit spreads to reflect the risk of a larger net long exposure.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
by William J. Bernstein
Published 12 Oct 2000

What the forward premium seems to be saying to the U.S. holder of a Japanese five-year bond (currently yielding only 1%) is: “Don’t worry about the low yield, you’ll make up the difference with a 6% annual currency appreciation.” In fact, however, exchange rate history suggests that on average this doesn’t happen. Over the past several decades, global bond managers have made excess returns purchasing unhedged high-yielding bonds of developed nations with negative forward spreads,reaping advantage when the underlying currency fails to depreciate as much as forecast by the forward spread.This market inefficiency is probably the result of the fact that governments are major players in the currency game; governments are different from individual and institutional investors in that their primary goal is not profit, but rather currency defense.

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Correlation of Annual Returns, 1973–1998 185 S&P USSM EAFE HY LTGC IB T-Bill Gold NATR REIT 1Y UKSM JPSM S&P USSM EAFE HY LTGC IB T-Bill Gold NATR REIT 1Y UKSM JPSM 1.00 0.66 0.46 0.53 0.57 0.06 ⫺0.09 0.09 0.53 0.56 ⫺0.04 0.24 0.04 1.00 0.34 0.57 0.31 0.00 ⫺0.01 0.21 0.59 0.84 0.05 0.41 0.06 1.00 0.31 0.19 0.54 ⫺0.15 0.23 0.35 0.33 ⫺0.11 0.64 0.69 1.00 0.65 0.26 ⫺0.11 ⫺0.02 0.13 0.64 0.16 0.23 0.01 1.00 0.26 0.06 ⫺0.06 ⫺0.08 0.29 0.30 ⫺0.02 ⫺0.10 1.00 ⫺0.31 0.06 ⫺0.08 0.01 ⫺0.15 0.57 0.54 1.00 0.22 0.04 0.02 0.93 ⫺0.14 ⫺0.06 1.00 0.56 0.34 0.15 0.30 0.11 1.00 0.62 ⫺0.08 0.34 0.16 1.00 0.08 0.38 0.03 1.00 ⫺0.13 ⫺0.10 1.00 0.41 1.00 S&P = Standard & Poor’s 500, USSM = U.S. Small Stocks (CRSP 9-10 Decile), EAFE = MSCI Europe, Australasia and Far East, HY = First Boston High Yield Bond Index, LTGC = Lehman Bros. Long-Term Government Corporate Bond Index, IB = Salomon Brothers NonDollar World Government Bond Index, T-Bill = 30-Day U.S. Treasury Bill, Gold = Morningstar Precious Metals Fund Average, NATR = Morningstar Natural Resources Fund Average, REIT = National Association of Real Estate Investment Trusts (Equity REIT only) Index, 1 Y = One-Year Corporate Bond Index (Dimensional Fund Advisors), UKSM = Hoare-Govett/DFA United Kingdom Small Company Fund, JPSM = Nomura DFA Japan Small Company Fund. 

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Small Stocks (CRSP 9–10 Decile), REIT = National Association of Real Estate Investment Trusts (Equity REIT only) Index, EAFE = MSCI Europe, Australasia, and Far East, INTSM = DFA International Small Company Strategy/Fund, EM = DFA Emerging Markets Fund, EMSM = DFA Emerging Markets Small Company Index/Fund, T-Bond = 20-Year U.S. Treasury Bond Index (Ibbotson Assoc.), 1 Y = One-Year Corporate Bond Index (DFA), T-Bill = 30-Day U.S. Treasury Bill, IB = Salomon Brothers Non-Dollar World Government Bond Index, HY = First Boston High Yield Bond Index, NATR = Morningstar Natural Resources Fund Average, Gold = Morningstar Precious Metals Fund Average. Glossary Active management: The process of using security analysis in an attempt to obtain returns higher than those offered by the market. Alpha: The degree to which a manager’s or fund’s return differs from that of a benchmark.

Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime
by Abraham Okusanya
Published 5 Mar 2018

Chasing yield Of course, an advocate of natural yield will argue that a natural yield portfolio will specifically overweight high-yield assets such as equities, commercial property, real estate investment trusts (REITs) and high-yield bonds. A paper by Vanguard11 exposes the flaws in this thinking. I want to pick out these key drawbacks: Fig. 18: First year’s, lowest, mean and highest real natural income over the entire 30-year period for various start dates Fig. 19: Cumulative total returns during the global financial crisis (12 Oct.,2007 to Mar., 2009) a) High-yield asset classes such as commercial property/ REITs, equities and high-yield bonds tend to have large drawdowns, particularly during stressful market conditions. Fig. 19 is taken from the Vanguard paper referred to earlier and it shows the total returns of major asset classes, including high-yield ones during the financial crisis of 2008.

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All
by Mary Childs
Published 15 Mar 2022

As the portfolios of competitors lost much of their gains, Pimco Total Return returned. By the end of the year, Total Return had generated 9.1 percent. Morningstar, which rates fund performance, said Total Return “smoked” competitors and beat its benchmark by almost 2 percentage points—“an astounding margin of victory in the bond world.” Riskier high-yield bonds, like the ones Pimco had eschewed in the run-up, eked out less than 2 percent. * * * “When Humpty Dumpty cracked, our performance was excellent,” Gross said years later. People outside his own market started to hear about the bond savant who’d seen the crisis coming. The legend of Bill Gross grew.

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Gross and Pimco knew they could get away with it, because Wall Street needed them. Gross believed that before it was true, before Pimco was big enough for this belief to make sense. “Because [they] were so big and paid so much in revenue to these firms, people were forced to put up with [their] shit,” says one former high-yield bond salesman. A lot of people tried to get away with bad behavior, but they couldn’t; it caught up to them. Pimco could. “Because they did so much business, they had everyone in such tight competition against each other, they really could get away with squeezing that sixteenth, and they’d still get the next call.”

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His strong conviction that he was getting ripped off meant he applied intense diligence to ensure he wouldn’t be; he insisted, even more than with regular old investment-grade corporate bonds, on extracting discounts from the Street, buying bonds cheaper than anyone wanted to sell them. Everyone wanted cheap bonds, of course, but Gross demanded maximal pressure in high yield to wring more basis points out of the Street. Executing this fell to Williams: whenever Bill Gross wanted high-yield bonds, Williams had to go out and get them, which meant Williams had to go on a suicide mission to the banks and badger them, again and again, demanding discounts he knew were unreasonable. This soured them toward him, and soured him. Which was why, after he was fired in March 2012, he was fucked.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian
Published 26 Jan 2016

Yet, having to go through a diminished middle, the pipes that link them have done more than fail to keep up in relative terms; they have actually contracted. Figure 10. Intermediaries and end users Two factors amplify the consequences of this growing imbalance, which is particularly acute for certain asset classes that lack inherent depth (such as emerging-market corporates and high-yield bonds) as well as products that many investors seem to believe are always highly liquid at acceptable prices (from ETF structures to TIPs). First, only the middle circle has access to funding windows of central banks. The end users in the outer circles do not. As such, there is no easy way to diffuse the pressure of too much flow trying to get through very narrow intermediation pipes.

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On the downside, the pressure on already mismanaged oil producers could tip them into playing a more disruptive regional and global role. Lower prices will also push some commodity and commodity-related companies into payments difficulties, with likely contagion for certain asset classes that are heavily dominated by them (such as high-yield bonds and emerging-market corporates). They also discourage investment in future energy capacity, including shale. 2. HARNESSING DISRUPTIVE TECHNOLOGICAL INNOVATION The ongoing technological revolution is a second factor that contributes to a relatively unstable distribution of future potential outcomes.

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First, they have been repeatedly conditioned to believe that central banks will step in to normalize markets—and do so at virtually the first signs of real stress. Second, liquidity is “negative carry” in the sense that it usually involves some give-up of income (and possibly capital appreciation) potential relative to how else the money could be deployed—for example, earning nothing on cash while you could invest in a high-yield bond with a yield of 4–5 percent, but subject to a whole host of risk factors. As valid as these arguments are, they should not be used to obfuscate structural realities on the ground. Moreover, the longer central banks remain the “only game in town,” dedicated to repressing market volatility and artificially boosting asset prices, the greater the subsequent risk to their effectiveness and operational autonomy.

Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals
by John Lefevre
Published 4 Nov 2014

He then moves across to a sideboard, showcasing an array of framed family portraits and travel photos. And that’s when he sees a very familiar face in almost every single picture. It’s Charles Widdorf, our regional head of equity capital markets. Our piece-of-shit back-office geezer just fucked Charlie’s maid in the bed Charlie shares with his wife. The Roadshow Selling a new high-yield bond (also called a junk bond) for a company usually involves conducting a full investor roadshow. It is an integral part of the deal marketing process and can be of pivotal importance in terms of lowering a company’s cost of borrowing. London-Paris-Frankfurt-Milan-Madrid is a typical European circuit, often traveling by private plane, always dining at the best restaurants and staying at the finest hotels.

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If this isn’t strange enough, he also has KFC chicken skins stuck to his face. This becomes evident when, mid-­routine, he starts eating one of the skins that is sliding down his cheek. I later find out it was the result of having lost a bet. Suffice to say, we never got to lead the first-ever Chinese corporate high-yield bond. But then again, neither did Morgan Stanley. Bluetooth The frosted glass doors separating the trading floor from capital markets glide open. It’s Earpiece, the head of . You wouldn’t know it from his swagger, but he’s responsible for one of the least sexy products in the entire bank, excluding whatever the fuck the brown suits do in repo, commercial paper, or cash management.

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“Hey, you know we’re pitching X bank next week for a bond deal. Does your dad know the CEO? Maybe he can remind them that you’d be on the deal team if we’re mandated.” There were even times when we weren’t above asking one of these analysts to help us out on a deal. For one notable Indonesian high-yield bond, we were so close to getting it over the line that, having exhausted all institutional avenues, we decided any little bump in interest from retail investors via the private banks could make a difference. “Hey, why don’t you show this deal to your dad? It’s got an 11% coupon.” As far as Princelings go, Justin is a great guy.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

Even if some of the business did go bust, by investing across a large spread of these companies, on average, the investor stood to gain a fortune. It was like putting Harry Markowitz’s modern portfolio theory on steroids. While this itself was revolutionary in the eighties, the real transformation of these high yield bonds was that now outsiders from the financial system were given access to capital that was previously denied to them by traditional banks. Capital in the past was in the hands of the great American industrial families. But with high yield bonds, capital was democratized and no longer the property of a small group. An increasing number of new entrepreneurs who invested in junk bonds became wealthy, which brought in new investors who were eager to purchase these junk bonds.

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His strategy was thus to take away economic decision-making powers from the government and hand it to the financial markets and Wall Street. Unsurprisingly, this became a moment of opportunity for most Wall Street bankers. One of the bankers who leapt at this opportunity was Michael Milken, the future founder of the Milken Institute. Milken had invented a debt instrument called high-yield bonds (which the established banks called junk bonds ) which he had used as a way to raise vast sums to build casinos in Las Vegas. Casinos were a business most banks avoided, as they were too risky. But Milken was able to show that as the risk involved with these investments was higher, it allowed investors to demand a very high rate of return.

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In essence it became a tool to challenge the established power on Wall Street as it began to be implemented in the form of takeovers. One of the first policies passed by Reagan relaxed the rules that governed the takeover of companies. Milken realised that the passing of this policy could allow his high yield bonds to raise large sums of money, as although there was high amount of risk involved, hidden away in established corporations were assets that could be unlocked, sold off, and turned into fantastic profits for investors (Curtis and Hobley, 1999). Not only did this lead to hostile takeovers of the established incumbents, it also meant that the power of capital creation had now moved from the hands of a few to the markets.

Den of Thieves
by James B. Stewart
Published 14 Oct 1991

The New York Stock Exchange and the NASDAQ over-the-counter market are simply institutionalized market-making organizations, which provide the additional service of published trading prices.) Other banks, such as Lehman Brothers, the market leader in high-yield bonds, would underwrite some new issues and husband those it had previously underwritten, but this was mostly a service to existing clients; other firms weren't interested in being active market-makers. So Milken became, in effect, the market for high-yield bonds. He had an incredible memory, and he knew who owned what issues, what they had paid, their yield to maturity, and who else wanted them. Increasingly, his clients developed such confidence in his research and market acumen that when he urged them to invest in a particular issue.

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And its reputation was hardly so sterling that a hostile raid or two would do much to tarnish it. Joseph and his colleagues returned to New York, spreading the word around the firm to be alert to the possibility of hostile deals. But the big push, he decided, would come at the upcoming high-yield bond conference. There, Joseph and Milken would unveil their new strategy for transforming the world of hostile takeovers. The high-yield bond conference had begun small, in the late 1970s, two years before Milken moved his operation to the West Coast. The market had been in a slump at the time, and Milken had been in one of his rare demoralized states. He complained to Joseph that he couldn't get any buyers to listen to his message about the profit possibilities in low-rated paper.

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Boesky and Financial Corporation of Santa Barbara could be a similar vehicle. For Boesky, always in search of capital for his arbitrage plunges, an S&L offered unlimited funds. But whatever Boesky's own plans for the capital, Milken and his team could, with some confidence, predict where most of the money would end up: invested in high-yield bonds chosen by Milken. That was the price his clients paid for continued access to Milken. Nagle was invited to a meeting of what Boesky had begun calling his "merchant banking" group at the Elbow Beach Hotel in Bermuda. Boesky flew in by private jet, accompanied by his usual entourage: Conway; Steve Oppenheim, Boesky's accountant at Oppenheim, Appel, Dixon; and Stephen Fraidin, his lawyer from Fried, Frank.

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Published 7 Feb 2012

Though Schwarzman didn’t spell out specifics, he seemed to imply that if the need arose, Blackstone might cough up more money to buy bonds or agree to concessions on the bridge loan. “Those were the magic words I needed to hear,” says Lee. He was reassured, too, because he knew that Schwarzman had a vested interest in supporting Chemical. “He knew that if he could get me to be a major player in high-yield bonds, he would gain leverage” against other private equity firms. With Chemical in its corner, Blackstone would have an easier time trumping them in bidding contests. The deal was signed in November 1994 and sealed two months later. Blackstone invested $187 million for 75 percent, taking half of Union Carbide’s stake and all of Mitsubishi’s.

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If the improving economy had pushed cash flows up 20 percent, the company could now borrow an additional $100 million (20 percent of $500 million) assuming its bankers applied the same debt–to–cash flow figure they had when they financed the deal originally. That money could then be paid out to the company’s owners. But the takings were even larger than that because bankers had grown more generous as the debt markets improved. With a given annual cash flow, you could now borrow much more than you could in 2002. The high-yield bond market reopened in 2003 and 2004 and quickly matched its peaks in 1997 and 1998, sending interest rates tumbling as money cascaded in. A company issuing junk bonds at the beginning of 2003 had to offer an interest rate 8 percentage points over the rate on U.S. treasury bills. By December 2003 that spread had narrowed to just 4 percentage points.

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The 2.8 billion ($3.4 billion) deal value excludes pension liabilities. 10 The next morning: Blackstone press release, Mar. 30, 2004; Celanese press releases of Aug. 3, 2004, Aug. 19, 2005, and Dec. 22, 2006. 11 The problem was exacerbated: Chu interview. 12 The move to Dallas saved: Chu interview. 13 Two months after the dividend: Form S-1, Celanese Corp., Nov. 3, 2004, and Form 424B4, Celanese, Jan. 24, 2005; PPM for BCP V. 14 By the time they sold: Blackstone recorded a $2.9 billion gain on BCP IV’s $405.6 million investment in Celanese. 15 By Chu’s reckoning … on Blackstone’s watch: Chu interview and written response to fact-checking queries (source of profits and employee count); BASF, Dow Chemical, and Eastman Chemical financial reports (comparative cash flows); Celanese financials (productivity). 16 The economic slowdown: David Weidman, written response to query, mid-2009. 17 The Nalco investment: PPM for BCP V. 18 “You’ve got to have”: Chu interview. 19 It was a lesson: Schedule 14A, TRW Automotive Holdings Corp., Apr. 3, 2009 (Blackstone’s remaining stake); TRW press release, Mar. 1, 2010 (stock sale). Chapter 18: Cash Out, Ante Up Again 1 The mood shift: Dealogic data compiled for the authors on Apr. 7, 2009. 2 The high-yield bond market: Dealogic data compiled for the authors on Apr. 7, 2009. 3 That’s what happened with Nalco: Nalco financials; background interview with a source involved in the buyout. 4 Still, there had never before been: Vyvyan Tenorio, “The Dividend Debate,” Deal, Apr. 16, 2009; press reports on bond spreads. 5 The secondary buyouts: John E.

The Blue Cascade: A Memoir of Life After War
by Mike Scotti
Published 14 May 2012

They create billions of dollars of stocks and bonds and derivatives and sell them in the primary market to institutions—insurance companies, pension funds, and hedge funds—that have billions of dollars to invest. Later, the banks also buy and sell these same stocks and bonds and derivatives, for profit, in the secondary market. The magnitude of the transactions—a merger that creates a $10-billion-a-year behemoth company, or an offering of $2 billion in high-yield bonds—allows the Wall Street machine to cut off a nice slice of meat for itself. That’s why bankers and traders are paid so well. Wall Street and the clients it services deal in a global river of money unseen by most, which runs so swift and deep that its size and velocity are difficult to comprehend.

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The parallels between war and trading were true. And you could see the MDs eating it all up as their fingers slowly rubbed my résumé printed on heavy stock. Eyes twinkling as they thought about how much money I could make for them. * * * In October I scheduled an interview with an up-and-coming high-yield bond salesman named Lucas Detor who worked at Morgan Stanley. He was held in high regard by everyone who knew him. He’d driven tanks in the Army National Guard, worked as an agent in the Secret Service, and was now rising through the ranks very quickly. He’d made director within just a few years of graduating from Stern.

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The meeting was in a conference room on the forty-third floor. Up where the helicopters flew. You could see the whole city. Blinking lights. The span of the cityscape. I sat at the conference table with Lucas and the three other members of the board. One was the youngest person ever named partner at the law firm Kirkland & Ellis. The other two were high-yield bond traders, one at J.P. Morgan and the other at the multi-billion-dollar hedge fund Old Lane Capital. “Fellas, I lost one of my best buddies today, in Iraq. Captain Robert M. Secher. I don’t think it has really hit me yet. But I was wondering if it would be OK if I said a few words about him at the event.

The Little Book of Hedge Funds
by Anthony Scaramucci
Published 30 Apr 2012

After an extensive grounding in finance and markets with a number of banks over an eight-year period, I took the step to start a hedge fund and thereby realize my ambition to invest as a principal. 3. What hedge fund strategies do you use? Our fund is a fundamental credit trading fund, active in markets including high yield bonds, distressed debt, financials and ABS. 4. What do you see as the future of the industry? Alpha is not as scalable as recent growth trends would suggest. Therefore I see two paths for hedge funds: Path 1 will be to remain nimble, opportunistic and compact, maximizing returns in periods of dislocation, and preserving capital during stress.

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In a perfect scenario, the arbitrageur profits from a difference in the price between the two and earns an immediate profit with no market risk. For example, an announced deal might provide an opportunity for risk arbitrage, or the issuance of a convertible bond by a publicly traded company may signal an opportunity for convertible arbitrage. In the world of high-yield bond investing, getting long the bond and short the underlying stock is known as capital structure arbitrage investing (we’ll get to these terms in just a bit). Perhaps the most famous arbitrage desk in the world was created by Gus Levy at Goldman Sachs. Predecessors to Gus included L.J. Tenenbaum, Robert E.

The Intelligent Investor (Collins Business Essentials)
by Benjamin Graham and Jason Zweig
Published 1 Jan 1949

For others the early 1972 range of taxable yield would seem to be from 5.00% on U.S. savings bonds, with their special options, to about 7½% on high-grade corporate issues. Higher-Yielding Bond Investments By sacrificing quality an investor can obtain a higher income return from his bonds. Long experience has demonstrated that the ordinary investor is wiser to keep away from such high-yield bonds. While, taken as a whole, they may work out somewhat better in terms of overall return than the first-quality issues, they expose the owner to too many individual risks of untoward developments, ranging from disquieting price declines to actual default. (It is true that bargain opportunities occur fairly often in lower-grade bonds, but these require special study and skill to exploit successfully.)* Perhaps we should add here that the limits imposed by Congress on direct bond issues of the United States have produced at least two sorts of “bargain opportunities” for investors in the purchase of government-backed obligations.

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Commentary on Chapter 6 The punches you miss are the ones that wear you out. —Boxing trainer Angelo Dundee For the aggressive as well as the defensive investor, what you don’t do is as important to your success as what you do. In this chapter, Graham lists his “don’ts” for aggressive investors. Here is a list for today. Junkyard Dogs? High-yield bonds—which Graham calls “second-grade” or “lower-grade” and today are called “junk bonds”—get a brisk thumbs-down from Graham. In his day, it was too costly and cumbersome for an individual investor to diversify away the risks of default.;1 (To learn how bad a default can be, and how carelessly even “sophisticated” professional bond investors can buy into one, see the sidebar on p. 146.)

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Hazlitt, William hedging: and aggressive investors; and convertible issues and warrants; and defensive investors; and definition of intelligent investors; and expectations for investors; and half a hedge; and inflation; and investment funds; “related” and “unrelated,” Heine, Max Heinz (H.J.) Hennessy funds herding high-yield bonds. See junk bonds Hoffman, Mark “home bias,” Home Depot Honda Honeywell Corp. Horizon Corp. hostile takeovers Household International Housing and Urban Development (HUD), U.S. Department of Housing Authority bonds Houston Light & Power Co. “How much?” question Hudson Pulp & Paper “human factor” in selection Huron Consulting Group hyperinflation I-bonds Ibbotson Associates “In the Money” (CNN-TV), income.

The Permanent Portfolio
by Craig Rowland and J. M. Lawson
Published 27 Aug 2012

Investors who opt for this approach should realize that they are sacrificing deflation protection by making the decision to avoid U.S. Treasury bonds. A serious economic crisis could see widespread defaults in corporate bonds, including those previously considered very safe. Junk Bonds High-yield bonds (also known as junk bonds) are a type of bond with an enticingly high yield but lots of risk. Don't let the high interest rates convince you to buy them for the Permanent Portfolio, as they are totally unsuitable for this application. Bonds are for safety and not speculation. Buying higher risk bonds means you are chasing yield and it can be dangerous because higher rewards always mean higher risk.

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Figure 7.3 shows the performance of junk bonds versus long-term U.S. Treasury bonds. Figure 7.3 2008 Performance of Long-Term U.S. Treasury Bonds versus Junk Bonds.U.S. Treasury bonds were up over 30 percent and junk bonds sunk by 30 percent providing no diversification benefit and compounding losses. Chart courtesy of stockcharts.com. Imagine owning high-yield bonds thinking they would protect you in a bad market only to see the fund sink by 30 percent right along with your stocks. That's not the kind of diversification you need in the Permanent Portfolio. Stick with U.S. Treasury bonds. International Bonds International bonds offer currency and political risks to investors.

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See individual retirement accounts iShares: iShares Barclays Capital Euro Government Bond 15 to 30 Year iShares Barclays Capital Euro Treasury Bond 0 to 1 Year iShares Barclays Capital Euro Treasury Bond 1-3 Year iShares DEX Long-Term Bond Index ETF iShares EAFE Index ETF iShares FTSE 100 iShares FTSE Gilts 0-5 iShares FTSE UK All Stocks GILT iShares Gold ETF iShares MSCI Australian 200 Index iShares Russell 3000 Index ETF iShares Short Term Bond Index ETF iShares Short Term Treasury ETF iShares Short Treasury Bond Fund iShares Short Treasury ETF iShares S&P 500 ETF iShares S&P/TSX 60 Index iShares S&P/TSX Capped Index Fund iShares Treasury Long-Term Bond ETF iShares Very Short-Term Treasury ETF sample portfolios with website of Israel, economy and investments in Japan, economy and investments in Job. See Profession Junk or high-yield bonds Large cap stocks Lehman Brothers Leverage Lloyd's of London Madoff, Bernie Management fees. See also Costs Management risks. See Fund manager risks Margin loans Market panics: stable portfolios avoiding stock market crashes causing Market predictions, unreliability of Market timing: challenges of, impacting financial safety Permanent Portfolio avoidance of Market volatility: bond cash gold stability vs.

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

Scholes, The pricing of options and corporate liabilities, Journal of Political Economy, 81(3), 637–654, May–June 1973. J. Bulow, L.H. Summers, V.P. Summers, Distinguishing debt from equity in the junk bond era, in J. Shoven , J. Waldfogel (Eds), Taxes and Corporate Restructurings, Brooking Institution, 1990. M. Fridson, Do high-yield bonds have an equity component?, Financial Management, 82–84, Summer 1994. M. Jensen, W. Meckling, The theory of the firm: Managerial behavior, agency costs, and capital structure, Journal of Financial Economics, 3(4), 305–360, October 1976. Y. Le Fur, P. Quiry, Financing start-ups – there is equity and then there is equity!

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When the company plans several issues in the medium term, it can put out an umbrella prospectus to cover all of them, under an issue of EMTNs (euro medium-term notes). This allows the company to tap the markets very rapidly when it needs to or when the market is attractive. Bond issues are usually reserved for qualified investors, as issues to individual investors are much more cumbersome in terms of documentation. 2. High yield bonds By definition, high yield or non-investment grade bonds are risky products. High yield issues take longer and require more aggressive marketing than a standard issue, as there are fewer potential buyers. 3. Private placement As explained previously, private placements are an alternative to regular bond issues and allow issues of smaller amounts.

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The banks involved are generally keen to develop a business relationship with the borrower. Questions What is a prospectus used for? Why does it take longer to set up a share issue than a bond issue? What financial product can a greenshoe be compared to? Why is the timetable for a first issue for a company issuing a high yield bond much longer than for the issue of a standard bond? Which placement procedure carries the most risk for a bank? Why? Describe two different methods used for calculating the value of a subscription right. Will a shareholder who subscribes to a capital increase with a pre-emptive subscription right become poorer if the share price drops after the operation?

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

Only we would add that if we have learned anything in the past four decades, it is that financial innovation includes the sabotage not only of governments but also of clients and competitors. It is this unique ability to combine all three of the qualities John Tuld lists to his board that seems to ensure really big money. THE KING OF JUNK In the early 1980s a certain Michael Milken invented what became known as the ‘junk bond’; or, more elegantly, the high-yield bond. Junk bonds are considered among the most important innovations in twentieth-century finance. Their creator, Michael Milken, would be widely celebrated by the industry. Eventually Milken’s efforts would afford him residency of an exclusive gated community in California, better known as the Bay Area Prison.

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He was convinced that those ‘fallen angels’ could be better managed and financed by a more innovative, ‘structured’ approach. The beauty of his idea was that these companies’ low ratings meant they paid much higher interest on their bonds. Traditionally, high yield is a corollary of high risk. But in this case, risks could be reduced through better management of the companies. As a result, investors would get high-yield bonds with relatively low, managed risk. Put differently, companies that would receive the Milken treatment would attract new investment as their bonds would be snapped up in the market and could then use the money to improve their performance. A true win-win for all. Working at Drexel Benham Lambert – the institution, now defunct, which had agreed to underwrite the enterprise – Milken created and dominated the over-the-counter (OTC) market in the new type of securities.

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School
by Andrew Hallam
Published 1 Nov 2011

Profiting from Panic—Stock Market Crash 2008–2009 Having a Foreign Affair Introducing the Couch Potato Portfolio Combinations of Stocks and Bonds Can Have Powerful Returns RULE 6: Sample a “Round-the-World” Ticket to Indexing Indexing in the United States—An American Father of Triplets Indexing In Canada—A Landscaper Wins by Pruning Costs Indexing in Singapore—A Couple Builds a Tiger’s Portfolio in the Lion City Indexing in Australia—Winning with an American Weapon The Next Step RULE 7: Peek Inside A Pilferer’s Playbook How Will Most Financial Advisers Fight You? The Totem Pole View Is Government Action Required? RULE 8: Avoid Seduction Confession Time The dumbest investment I ever made Investment Newsletters and Their Track Records High-Yielding Bonds Called “Junk” Fast-Growing Markets Can Make Bad Investments Gold Isn’t an Investment What You Need to Know about Investment Magazines Hedge Funds—The Rich Stealing from the Rich RULE 9: The 10% Stock-Picking Solution...If You Really Can’t Help Yourself Using Warren Buffett Commit to the Stocks You Buy Stocks With Staying Power Selling Stocks The Nine Rules of Wealth Checklist Index Advance Praise for Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School Andrew Hallam’s book is just the right one for novice investors.

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Based on that statistic, the odds of beating the stock market indexes by following an investment newsletter are less than seven percent.7 Put another way, how would this advertisement grab you? You could invest with a total stock market index fund—or you could follow our newsletter picks. Our odds of failure (compared with the index) are 93 percent. Sign up now! If investors knew the truth, financial newsletters probably wouldn’t exist. High-Yielding Bonds Called “Junk” At some point, you might fight the temptation to buy a corporate bond paying a high interest percentage. It’s probably best to avoid that kind of investment. If a company is financially unhealthy, it’s going to have a tough time borrowing money from banks, so it “advertises” a high interest rate to draw riskier investors.

Retire Before Mom and Dad
by Rob Berger
Published 10 Aug 2019

You might wonder why anybody would invest in a bond issued by a government or corporation that has a higher risk of default. In a word—yield. Yield is a fancy word for interest rate. The higher the credit risk, the higher the yield. In fact, mutual funds that invest in corporate bonds issued by companies with shaky financials are called High Yield bond funds. High yield bonds are also called Junk Bonds. To be clear, junk bonds are not junk. They have more risk, but they also have potentially more reward. Interest Rate Risk Most bonds don’t protect you against the risk that interest rates will rise. Recall that as rates rise, the value of existing lower-yielding bonds fall.

Ethics in Investment Banking
by John N. Reynolds and Edmund Newell
Published 8 Nov 2011

Arranging finance would consist of preparing presentations to potential funders and securing financing (normally debt, but this can also include additional sources of equity finance) Bait and switch: investment banking practice of marketing a (senior) team of bankers to a client and then replacing them with more junior bankers once a mandate has been awarded Big cap: a quoted company with a large market capitalisation or share value Business ethics: an ethical understanding of business, applying moral philosophical principles to commerce Capital markets: collective term for debt and equity markets; reference to the businesses within an investment bank that manage activity in the capital markets Casino capitalism: term used to describe high-risk investment banking activities with an asymmetric risk profile Categorical imperative: the concept, developed by Immanuel Kant, of absolute moral rules CDS: credit default swap, a form of financial insurance against the risk of default of a named corporation CEO: chief executive officer, the most senior executive officer in a corporation viii Glossary ix Church Investors’ Group (CIG): a group of the investment arms of a number of church denominations, mainly from the UK and Ireland Code of Ethics: an investment bank’s statement of its requirements for ethical behaviour on the part of its employees Compensation: investment bankers’ remuneration or pay Compliance: structures within an investment bank to ensure adherence to applicable regulation and legislation Conflict of interest: situation where an investment bank has conflicting duties or incentives Corporate debt: loan made to a company Credit rating: an assessment of the creditworthiness of a corporation or legal entity given by a credit rating agency CSR: Corporate Social Responsibility DCF: discounted cash flow Debtor in Possession finance (DIP finance): secured loan facility made to a company protected from its creditors under chapter 11 of the US bankruptcy code Derivative: a security created out of an underlying security (such as an equity or a bond), which can then be traded separately Dharma: personal religious duty, in Hinduism and Buddhism Discounted cash flow valuation: the sum of: • the net present value (NPV) of the cash flows of a company over a defined timescale (normally 10 years); • the NPV of the terminal value of the company (which may be the price at which it could be sold after 10 years); and • the existing net debt of the company Distribution: the marketing of securities Dodd–Frank Act: the Dodd–Frank Wall Street Reform and Consumer Protection Act Downgrade: a reduction in the recommended action to take with regard to an equity; or a reduction in the credit rating of a corporation Duty-based ethics: ethical values based on deontological concepts EBITDA: Earnings Before Interest Tax Depreciation and Amortisation EIAG: the Ethical Investment Advisory Group of the Church of England Encyclical: official letter from the Pope to bishops, priests, lay people and people of goodwill x Glossary Enterprise value (EV): value of an enterprise derived from the sum of its financing, including equity, debt and any other invested capital, which should equate to its DCF value ERM: the European Exchange Rate Mechanism, an EU currency system predating the introduction of the euro ETR: effective tax rate EV:EBITDA: ratio used to value a company Exit: sale of an investment Free-ride: economic term for gaining a benefit from another’s actions Financial adviser: see Adviser Glass–Steagall: the 1933 Act that required a separation of investment and retail banking in the US Golden Rule: do to others as you would have them do to you Hedge fund: an investment fund with a specific investment mandate and an incentivised fee structure (see 2 and 20) High yield bond: debt sold to institutional investors that is not secured (on the company’s assets or cash-flows) HMRC: Her Majesty’s Revenue and Customs, the UK’s authority for collecting taxes Hold-out value: value derived from the contractual right to be able to agree or veto changes Ijara: Shariah finance structure for project finance Implicit Government guarantee: belief that a company or sector benefits from the likelihood of Government intervention in the event of crisis, despite the fact that no formal arrangements are in place Initial Public Offering (IPO): the initial sale of equity securities of a company to public market investors Insider dealing: trading in shares in order to profit from possessing confidential information Insider trading: see Insider dealing Integrated bank: a bank offering both commercial and investment banking services Integrated investment bank: an investment bank that is both active in capital markets and provides advisory services Internal rate of return (IRR): the annualised return on equity invested.

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Calculated as the discount rate that makes the net present value of all future cash flows zero Investment banking: providing specialist investment banking services, including capital markets activities and M&A advice, to large clients (corporations and institutional investors) Glossary xi Investment banking adviser: see Adviser Islamic banking: banking structured to comply with Shariah (Islamic) law Junior debt: debt that is subordinated or has a lower priority than other debt Junk bond: see High yield bond Lenders: providers of debt finance Leverage: debt Leveraged acquisition: acquisition of a company using high levels of debt to finance the acquisition LIBOR: London Inter-Bank Offered Rate, the rate at which banks borrow from other banks Liquidity: capital required to enable trading in capital markets M&A: mergers and acquisitions; typically the major advisory department in an investment bank Market abuse: activities that undermine efficient markets and are proscribed under legislation Market capitalism: a system of free trade in which prices are set by supply and demand (and not by the Government) Market maker: a market participant who offers prices at which it will buy and sell securities Mis-selling: inaccurately describing securities (or other products) that are being sold Moral hazard: the risk that an action will result in another party behaving recklessly Moral relativism: the concept that morals and ethics are not absolute, and can vary between individuals Multi-notch downgrade: a significant downgrade in rating or recommendation (by a rating agency) Natural law: the concept that there is a universal moral code Net assets: calculated as total assets minus total liabilities Net present value (NPV): sum of a series of cash inflows and outflows discounted by the return that could have been earned on them had they been invested today NYSE: New York Stock Exchange Operating profit: calculated as revenue from operations minus costs from operations P:E: ratio used to value a company where P (Price) is share price and E (Earnings) is earnings per share Price tension: an increase in sales price of an asset, securities or a business resulting from a competitive situation in an auction xii Glossary Principal: equity investor in a transaction Principal investment: proprietary investment Private equity: equity investment in a private company Private equity fund: investment funds that invest in private companies Proprietary investment: an investment bank’s investment of its own capital in a transaction or in securities Qualifying instruments: securities covered by legislation Qualifying markets: capital markets covered by legislation Quantitative easing: Government putting money into the banking system to increase reserves Regulation: legal governance framework imposed by legislation Restructuring: investment banking advice on the financial restructuring of a company unable to meet its (financial) liabilities Returns: profits Rights-based ethics: ethical values based on the rights of an individual, or an organisation SEC: the Securities and Exchange Commission, a US regulatory authority Sarbanes–Oxley: the US “Company Accounting Reform and Investor Protection Act” Senior debt: debt that takes priority over all other debt and that must be paid back first in the event of a bankruptcy Shariah finance: financing structured in accordance with Shariah or Islamic law Sovereign debt: debt issued by a Government Speculation: investment that resembles gambling; alternatively, very short-term investment without seeking to gain management control Socially responsible investing (SRI): an approach to investment that aims to reflect and/or promote ethical principles Spread: the difference between the purchase (bid) and selling (offer) price of a security Subordinated debt: see Junior debt Syndicate: group of banks or investment banks participating in a securities issue Syndication: the process of a group of banks or investment banks selling a securities issue Takeover Panel: UK authority overseeing acquisitions of UK public companies Too big to fail: the concept that some companies or sectors are too large for the Government to allow them to become insolvent Glossary xiii Unauthorised trading: trading on behalf of an investment bank or other investor without proper authorisation Universal bank: an integrated bank Utilitarian: ethical values based on the end result of actions, also referred to as consequentialist Volcker Rule: part of the Dodd–Frank Act, restricting the proprietary investment activities of deposit-taking institutions Write-off: reduction in the value of an investment or loan Zakat: charitable giving, one of the five pillars of Islam This page intentionally left blank 1 Introduction: Learning from Failure There has been significant criticism of the ethics of the investment banking sector following the financial crisis.

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

As underwriting standards declined, the leveraged loan market became dominated by so-called ‘covenant-lite’ issues, which came without the protections traditionally afforded creditors, such as limits on taking on more debt. Some leveraged loans even came with a payment-in-kind feature, which allowed them to make interest payments with their own paper rather than cash.14 By 2018 there were more than $1 trillion of leveraged loans outstanding, roughly the same amount as was owed in the high-yield bond market. Buyout firms used leverage loans and junk bonds to finance their deals and to extract cash from their portfolio companies (‘dividend deals’) and to flip their companies to competing private equity outfits (the ‘daisy chain’). Thanks to easy financing conditions, private equity companies were able to raise more money to acquire more companies and pile on more leverage than ever before.15 Buyout profits were sustained by the wide spread between cheap borrowing costs and the returns earned by portfolio companies.

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US household wealth climbed faster than ever before to reach a new high. After the initial dislocation, Treasury yields fell to an all-time low. US junk yields also declined to their lowest ever level. Around the world, some $18 trillion-worth of bonds yielded less than zero. In Europe, designated high-yield bonds sported negative yields. Warren Buffett’s long-time partner, Charlie Munger, described the market frenzy as ‘the most dramatic thing that almost ever happened in the entire world history of finance’.8 He wasn’t exaggerating. Cash flowed from American stimulus cheques into the millions of new accounts opened at Robinhood Markets.

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Aked, Michael, Mazzoleni, Michele and Shakernia, Omid, ‘Quest for the Holy Grail: The Fair Value of the Equity Market’, Research Affiliates, March 2017. Allen, Frederick Lewis, Only Yesterday: An Informal History of the 1920’s (New York, 1957). Altman, Edward and Kuehne, Brenda, ‘Defaults and Returns in the High-yield Bond Market: Third-quarter 2013 Review’, Journal of Financial Management, August–December 2013. Altman, Edward and Kuehne, Brenda, ‘Special Commentary: A Note on Credit Market Bubbles,’ International Journal of Banking, Accounting and Finance, 5 (4), January 2015. Anderson, Benjamin McAlester, Economics and the Public Welfare [1949] (Indianapolis, 1979).

Personal Investing: The Missing Manual
by Bonnie Biafore , Amy E. Buttell and Carol Fabbri
Published 24 May 2010

If the dollar falls compared to your investment’s currency, your investment loses value. Currency exchange rates work in your favor when the dollar is strong compared to other currencies. When your portfolio grows large enough or you’re well ahead of your plan, you may yearn to gamble on higher-risk investments, such as micro-company stocks or high-yield bonds. As a rule of thumb, the average investor shouldn’t invest more than 10% in high-risk investments. Asset Allocation Smart investors don’t pursue the current investment rage (because they know it’s already old news). Nor do they try to trounce market averages. Instead, they use a simple approach that delivers the goods: asset allocation.

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See also college expenses; health care; retirement contributions required to achieve, 31–33, 37–38, 43 determining, 3, 21–23 enjoyable pursuits, 36 inheritance, leaving, 36 second home, 35 short-term, 14 versions of, based on likelihood of accomplishing, 22 Graham, Benjamin (stock advice by), 111 gross margin for a company, 119 gross profit, 106 growth funds, 79 growth of company, evaluating, 108–111 H health care, 33–34 cost of, 27, 224 employer-sponsored insurance plans, 215–216 Flexible Spending Accounts (FSAs), 216 health savings account (HSA), 67, 218–224 high-deductible insurance plans, 215, 218–224 individual insurance plans, 216–218 insurance providers of, negotiating with, 224–226 long-term care (LTC), 33–34, 226 medical savings account (MSA), 67 for parents, 35 types of insurance, 214–215 HealthcareBluebook.com website, 224 health-care power of attorney, 35 health maintenance organization (HMO), 214 health savings account (HSA), 67, 218–224 hedge funds, 101 HELOC (home equity line of credit), 42 herd behavior of investors, 45 high-deductible plans, 215, 218–224 high-yield bonds, 132, 159 HMO (health maintenance organization), 214 holding period risk, 159 home equity line of credit (HELOC), 42 Housing and Urban Development (HUD) counseling center, 40 How Much You Have to Save worksheet, 31–33 HSA (health savings account), 67, 218–224 HUD (Housing and Urban Development) counseling center, 40 hybrid REITs, 143 I immediate successes, desire for, 45 income statement, company, 105–106 independent 529 plan, 203 index funds, 60, 71, 72, 73–74, 162, 166.

Wall Street Meat
by Andy Kessler
Published 17 Mar 2003

.” · · · I think back and laugh at how stupid I must have seemed pitching a growth story like Intel and semiconductors back in 1989. Leveraged buyouts, LBOs, were all the rage. Junk 103 Wall Street Meat bonds, despite the bad name they got leading up to the ’87 crash, were plentiful. Salomon, Goldman, Merrill and even Morgan Stanley had taken share from Drexel Burnham peddling high-yield bonds to whoever could use them. Technology companies couldn’t use these junk bonds. Research and development to advance technology cost too much, and either you pay interest or you fund R&D. Anyone back on R&D would be dead within 18 months. Of course, I was still new to Morgan Stanley as an analyst.

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and, 173 Grano, Joe, 85 Graziano, Joe, 158 “Great Wall Street rip-off,” 225 Greenberg, Ed, 60, 89, 116–17, 131, 151 Greenberg, Herb, 183 Greenspan, Alan, 228 Grove, Andy, 17 growth-over-value era, 105 Grubman, Jack, 1, 7, 11, 20, 28, 43–44, 51, 53, 66, 73–74, 76–79 AT&T and, 56–57, 59, 216–18 ban from securities business, 231 boxing experience of, 67 250 Congressional hearings and, 227 earnings predictions and, 33–35, 37 GTE and, 39 Institutional Investor listing, 79 reputation of, 59–60, 89, 117, 164, 242 Salomon Brothers and, 165, 209–13, 216–18 telecommunications and, 220–21, 226–27 GTE, 35, 39 Hackworth, Mike, 93 Hambrecht and Quist, 184 Harmon, Susan, 74 Harris, Bob, 161, 165, 201 Harrison, Al, 43, 47, 224 Havens, John, 125 Hawkins, Trip, 162 Hermann, Hank, 28–29, 88–89, 230 Hersov, Rob, 155 Hewlett-Packard, 76 high-yield bonds, 104 Huckman, Mike, 226–27 Huller, John, 141, 142–43, 151–52 Hutchins, Mitchell, 39 IBM, 8, 52, 55, 67 Indefeasible Rights of Use (IRUs), 220 indexes, of the market, 172–73 Index infinite P/E, 31–32 Infospace, 214 initial public offerings (IPOs), 46, 83–84 allocations on, 209–10 beginning of boom in, 8 investment bankers and, 190 lockups and, 188–90, 201–2 pricing, 114–16 Inktomi, 177, 180 Instinet, 197, 199 institutional equity sales, 23 Institutional Investor magazine analyst ranking, 25, 46–48, 75, 143 integrity, 239–44 Intel, 17–18, 72–73, 103, 104, 105, 124–25 loss report in 1986, 57–59 upswing of 1987, 60 warrants, 163–64 Interactive Media fund, 165 Interfilm, 165 Internet companies, 173–74, 180 Intuit, 135 investment bankers, IPOs and, 190 investment banking, 241–42 IPOs.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank
by John Tamny
Published 30 Apr 2016

Even better, new sources of credit constantly innovate around the Federal Reserve. While this will be discussed in greater detail in future sections of this book, for now it’s worth migrating to a form of finance that reached full flower around the same time that Trump rocketed to his early fame, high-yield finance. Readers may better know “high-yield bonds” as “junk bonds,” the latter being the pejorative members of the media attached to them long ago. Readers needn’t worry. There’s nothing complicated here. To understand “junk” or “high-yield” debt, let’s first imagine you have $10,000 lying around. Next, imagine that actress Jennifer Lawrence asked to borrow it.

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His discovery that past performance wasn’t always a predictor of future performance (remember when Renée Zellweger and Cuba Gooding were A-list actors?) meant that he could bring investment banking services to the blue chips of tomorrow. As Fischel describes, “Whole industries—including gambling, telecommunications, and healthcare—were financed in significant part with high-yield bonds.”14 The list of companies that were the result of Milken securing them access to credit includes MCI, CNN, Turner Broadcasting, and Occidental Petroleum.15 What’s important here is that while the Fed seeks to influence credit by exchanging dollars for bonds held by banks, which can then lend the dollars, Milken was sourcing credit for companies that banks traditionally passed over.

The Heart of Business: Leadership Principles for the Next Era of Capitalism
by Hubert Joly
Published 14 Jun 2021

After a string of acquisitions, the group faced a liquidity crunch that had led to the exit of the CEO, Jean-Marie Messier, about nine months earlier. Concurrently, the company’s auditors, Arthur Andersen, had collapsed after the Enron scandal. Vivendi had decided to issue a high-yield bond in the United States and in Europe to extend the maturity of its existing debt, so it could sell some of the company’s assets without being under cash pressure. We had to close the books in order to be able to market the high-yield bond. As I worked with the company’s new auditors to unpack our financial reporting, I was struck by disconnects between reported earnings and economic reality. For example, according to accounting rules, a parent company can include 100 percent of the operating income of the businesses it controls in its own operating income, even if it owns only a fraction of these businesses.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

Government bond yields are obviously low, but yield curves remain upward-sloping. Survey-based bond risk premia are low, reflecting negligible inflation risk premia, bonds' safe-haven role, as well as central bank asset purchases. Credit spreads are below historical norms. Evidence is updated on realized credit premia for investment-grade and high-yield bonds, on excess returns for “fallen angels” and for short-dated bonds, and on active fixed-income managers. The long-run commodity premium is not predictable from spreads or valuations. A diversified portfolio of commodity futures has historically earned 3–4% over cash. This may seem like magic when single commodities averaged 0% over cash.

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According to one-factor asset pricing models like the Capital Asset Pricing Model (CAPM), it is the only premium that influences assets' expected returns. Public equities are the largest allocation in many investor portfolios. The equity premium dominates these portfolios' risk even more because equities are more volatile than most other asset classes and because the premium is also embedded in many assets outside public equities (e.g. high-yield bonds, hedge funds, private equity). Empirical analysis can focus either on the historical realized premium (can still debate which equity index – the large-cap S&P500 or a broader US index or an even broader global index; over which period – how distant histories remain relevant; whether over cash or long-term bonds; whether arithmetic or geometric mean) or on a forward-looking premium (often estimated based on some valuation ratios or discounted cash flow models, again leaving room for debate).

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An asset's yield (or its spread over the funding rate) is a good proxy for carry, but a broader definition of carry includes an asset's return in unchanged capital market conditions (see Koijen et al. (2018)).22 While positive carry does not ensure positive future returns, it does empirically predict them. The shortcomings of yield or carry as expected return proxies must be understood, and these vary across assets. For risky bonds, yield overstates expected returns, in some cases by a lot (for high-yield bonds, historically by about a half). For equities, dividend yield understates expected return because it misses growth. Naïve yield-seeking could push investors to a foreign market suffering from hyperinflation, or to the debt of a company at the brink of default, or to a structured bond which embeds short positions in myriad options and such high risks and high costs that a realistic expected return is negative.

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
by Maneet Ahuja , Myron Scholes and Mohamed El-Erian
Published 29 May 2012

We were the biggest and most active player in that market and everybody knew who we were,” says Gardner. In 2004, Avenue launched a European-focused distressed business with Rich Furst as the senior portfolio manager. In addition to buying distressed debt, the firm in Europe writes loans for small companies unable to obtain financing, an important offering because that region’s high-yield bond markets are less developed than those in the United States. Today, Avenue has most of its assets in its U.S. and European strategies, including more than $3.5 billion allocated to Europe investments overseen by Furst and a team of 20 dedicated investment professionals in London and Munich. The rest of the firm’s assets are invested in Asia, where Avenue began operating in 1999, and several other businesses.

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In the end, Axle got all the way back to par. Saba may be focused on the credit market, but that doesn’t mean it is limited to it. “Right now, I think the most interesting thematic trade is a shift out of credit and into equities, because stocks still offer good upside whereas the index of high-yield bonds is trading at $103 and will eventually reach a ceiling since even the best bonds mature at par,” says Weinstein. “So, the way to be positioned is to be long equities and short credit.” As an example of a credit and equity relationship he finds interesting, Weinstein discussed Wendy’s, the fast food restaurant chain.

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required
by Kristy Shen and Bryce Leung
Published 8 Jul 2019

Here’s where we make a distinction between corporate bonds and so-called high-yield bonds. Ratings agencies like Moody’s and Standard & Poor’s evaluate each corporate bond issue based on the company’s financial health and assign it a letter grade. A is great, B is okay, and C is sucky, just like in high school. AA is even better than A, and AAA is as high as you can go—basically risk-free. The term “corporate bonds” indicates bonds that are “investment grade,” or have a rating of BBB− or higher (using the Standard & Poor’s scale). Anything below that is considered a “high-yield” bond, or less politely, a “junk” bond. I’ve owned junk bonds and they are exceptionally volatile.

Smarter Investing
by Tim Hale
Published 2 Sep 2014

Simply owning lower volatility, shorter-dated, high credit quality bonds works as a reasonable alternative. Note that this exposure could be gained by owning non-GBP denominated bonds, but with all currency hedged back to Sterling by the fund manager. Avoid lower credit quality and ‘high yield’ bonds So far we have ignored lower quality investment grade bonds (those with credit ratings of BBB and above, but below an arbitrary cut-off of AA), along with high yield bonds (less than BBB). Their superficial appeal is that they generate higher levels of yield, but at a price. For cautious investors the price is that the lower you go on credit quality the more they act like equities, which could generate material losses.

Americana: A 400-Year History of American Capitalism
by Bhu Srinivasan
Published 25 Sep 2017

Armed with an encyclopedic memory of nearly every company and bond issue in this universe, Milken made his case to institutional investors such as pension funds, insurance companies, and savings banks to buy the bonds of these troubled companies. By the late seventies, Milken’s clients had made substantial returns, and Milken was a top player in the high-yield bond market. In one account, a loyal Milken client joked that a particular high-yield bond was priced like it was “junk.” The pejorative term stuck. But there was an unlikely competitor at the turn of the decade. The bonds of the government itself seemed to bear interest like junk bonds. When Ronald Reagan took office in January 1981, America was in the midst of a recession and a period of severe inflation, a rare combination.

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When the dust settled and interest rates normalized, investors continued to have an appetite for the types of interest rates that they had just seen. But there were only so many companies in the bond market that were solvent enough to make their payments but troubled enough to be traded like “junk.” Milken’s institutional investors wanted much more product than the market had. The solution was both bold and simple: More high-yield bonds needed to be created. To satiate his market, Milken sought out two types of candidates. The first were entrepreneurs of smaller businesses that wanted to become much, much larger. Milken’s entrepreneurs were in capital-intensive businesses or in industries that Wall Street at the time didn’t touch.

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Braddock Hickman, “Measures of Experience on Defaulted Issues,” in Statistical Measures of Corporate Bond Financing Since 1900 (Princeton: Princeton University Press, 1960), 483. were too risky: Bruck, Predators’ Ball, 30–32. made substantial returns: Ibid., 34–35. The pejorative term: Ibid., 39. 13 percent annually and $400 million bond issue: “15.31% Note Yield Lures Investors for Chrysler,” New York Times, February 27, 1981. More high-yield bonds: Bruck, Predators’ Ball, 100–101. wanted to borrow: Ibid., 59. entrepreneur Rupert Murdoch: Ibid., 245. last of the textile mills: Warren Buffett to shareholders of Berkshire Hathaway Inc., March 4, 1986. “more attractive uses”: Warren Buffett to shareholders of Berkshire Hathaway Inc., March 26, 1978.

Americana
by Bhu Srinivasan

Armed with an encyclopedic memory of nearly every company and bond issue in this universe, Milken made his case to institutional investors such as pension funds, insurance companies, and savings banks to buy the bonds of these troubled companies. By the late seventies, Milken’s clients had made substantial returns, and Milken was a top player in the high-yield bond market. In one account, a loyal Milken client joked that a particular high-yield bond was priced like it was “junk.” The pejorative term stuck. But there was an unlikely competitor at the turn of the decade. The bonds of the government itself seemed to bear interest like junk bonds. When Ronald Reagan took office in January 1981, America was in the midst of a recession and a period of severe inflation, a rare combination.

…

When the dust settled and interest rates normalized, investors continued to have an appetite for the types of interest rates that they had just seen. But there were only so many companies in the bond market that were solvent enough to make their payments but troubled enough to be traded like “junk.” Milken’s institutional investors wanted much more product than the market had. The solution was both bold and simple: More high-yield bonds needed to be created. To satiate his market, Milken sought out two types of candidates. The first were entrepreneurs of smaller businesses that wanted to become much, much larger. Milken’s entrepreneurs were in capital-intensive businesses or in industries that Wall Street at the time didn’t touch.

…

Braddock Hickman, “Measures of Experience on Defaulted Issues,” in Statistical Measures of Corporate Bond Financing Since 1900 (Princeton: Princeton University Press, 1960), 483. were too risky: Bruck, Predators’ Ball, 30–32. made substantial returns: Ibid., 34–35. The pejorative term: Ibid., 39. 13 percent annually and $400 million bond issue: “15.31% Note Yield Lures Investors for Chrysler,” New York Times, February 27, 1981. More high-yield bonds: Bruck, Predators’ Ball, 100–101. wanted to borrow: Ibid., 59. entrepreneur Rupert Murdoch: Ibid., 245. last of the textile mills: Warren Buffett to shareholders of Berkshire Hathaway Inc., March 4, 1986. “more attractive uses”: Warren Buffett to shareholders of Berkshire Hathaway Inc., March 26, 1978.

The Power of Passive Investing: More Wealth With Less Work
by Richard A. Ferri
Published 4 Nov 2010

One of the primary measures of the U.S. economy, the GDP is issued quarterly by the Department of Commerce. hedge A strategy in which one investment is used to offset the risk of another. high-yield fund A mutual fund that invests primarily in bonds with a credit rating of BB or lower. Because of the speculative nature of high-yield bonds, high-yield funds are subject to greater share price volatility and greater credit risk than other types of bond funds. index provider A company that constructs and maintains stock and bond indexes. The main providers are Standard & Poor’s, Citigroup, Dow Jones, Barclays Capital, Morgan Stanley, Russell, and Wilshire.

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Jensen’s alpha A ratio created by Michael Jensen that measures the return earned in excess of the risk free rate on a portfolio to the portfolio’s total risk as measured by the standard deviation in its returns over the measurement period. junk bond A bond with a credit rating of BB or lower. Also known as a high-yield bond because of the potential rewards offered to those who are willing to take on the additional risk of a lower-quality bond. large cap A company whose stock market value is generally in excess of $10 billion, although the amount varies among index providers. liquidity The degree of marketability of a security; that is, how quickly the security can be sold at a fair price and converted to cash.

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World
by Devin D. Thorpe
Published 25 Nov 2012

Small Growth: Funds that invest in small, growing companies Sector-Real Estate: Funds that invest in real estate related assets, including REITs Mid-Cap Blend: Funds that invest in mid-size companies, including both growth stocks and value stocks Large Value: Funds that invest in large companies viewed to be undervalued Multi-Sector Bond: Funds that invest in government bonds, foreign bonds, and high yield bonds (junk bonds) Long-Term Bond: Funds that invest in long term corporate bonds Intermediate Term Bond: These funds invest in corporate bond maturing in less than ten years. Short Term Bond: These funds invest in short term corporate bonds. Short Government Bond: These funds invest in short term Treasury Bonds.

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A value fund is one that invests in stocks that based on the fund manager’s judgment are undervalued in the market and are expected to rise based less on performance and more on a market correction. These funds don’t swing in value as much as growth funds, but they do go up and down. Choose a long term corporate bond fund. If you are aggressive, you may even want to consider a “high yield” bond fund that invests in junk bonds. Junk bonds are debts owed by companies expected to have difficulty paying. The yields on these bonds are significantly higher, but losses are not unusual. “Investment grade” bond funds can still lose value due to both credit risk (risk that the issuer defaults) and interest rate risk (the risk that the bond price drops because interest rates rose) but swings are smaller.

MONEY Master the Game: 7 Simple Steps to Financial Freedom
by Tony Robbins
Published 18 Nov 2014

For S&P, the grades range from AAA (the highest level of confidence that a company or country won’t default on its debts) to BBB (adequate for “investment grade” bonds), and all the way down to D (which means the bond issuer is already in default). The lower the rating, the more interest the issuer usually has to pay to bond holders for the risk that they’re taking. The expertly renamed high-yield bonds, formerly known as junk bonds, have a rating of lower than BBB, which makes them “subinvestment grade.” • Corporate Bonds. Corporations issue bonds when they want to raise money to expand, make acquisitions, pay dividends, fund a loss, or any number of reasons. Should you buy corporate bonds?

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That’s the kind of decision you’d have to make before buying the junk bond. Of course, not many of us have the experience or time to do this level of research. That’s where a talented fiduciary advisor who’s an expert in the area might come in handy. But there are also domestic and international high-yield bond index funds that can give you good returns while spreading the risk among many bonds. • Municipal Bonds. How about munis? When a state, city, or county needs to raise funds for a big public works project (sewer systems, hospitals, mass transit), it borrows money by issuing a bond. In the past, these municipal bonds were considered a win-win deal for everybody, because the interest they paid was usually exempt from federal and possibly state taxes.

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“You can not only bet on the market,” he told me, “but on countries, on industry sectors. And you may be right and you may be wrong.” David Swensen wonders why individual investors should bother with ETFs at all. “I’m a big believer in buying and holding for the long run,” he told me. “The main reason you’d go into an ETF is to trade. And so I’m not a big fan.” 2. High-Yield Bonds. You might also know these as junk bonds, and there’s a reason they call them junk. These are bonds with the lowest safety ratings, and you get a high-yield coupon (higher rate of return than a more secure bond) only because you’re taking a big risk. For a refresher, go back and read the bond briefing at the end of the last chapter. 3.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

The innovation in the 1970s and 1980s was that Drexel Burnham Lambert, then a third-tier investment bank, began to issue junk bonds, known in more polite circles as high yield bonds; the mastermind of this innovation was Michael Milken. The firms that issued these bonds had to pay high interest rates to attract buyers. Many firms issued junk bonds to get the cash to finance leveraged buyouts; often the senior executives of a firm would seek to buy all of its publicly traded shares. Or Firm A might issue high yield bonds to get the cash to acquire Firm B before Firm B got the cash to buy Firm A. So much for the facts that are not in dispute.

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The captive thrift institutions relied on the deposit guarantee of the US government; they offered high interest rates and used the money from the sale of deposits to buy the junk bonds that Drexel had underwritten. About half of the firms that had issued the junk bonds through Drexel Burnham Lambert went bankrupt and as a consequence the thrift institutions incurred large losses19; many of the institutions that had provided the ready market for the high yield bonds went bankrupt with losses to the American taxpayers of many tens of billions. But it was all legal. In a Cassandra-like book, Henry Kaufman decried the increase of all kinds of debt – consumer, government, mortgage, and corporate, including junk bonds; Kaufman argued that the quality of debt declined as the quantity of debt increased.20 Felix Rohatyn, a distinguished investment banker and the head of the US office of Lazard Frères, called the United States ‘a junk-bond casino’.

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio
by Victor A. Canto
Published 2 Jan 2005

Differential tax rates can potentially produce a before-tax return ranking that is much more attractive than the after-tax ranking. Ultimately, when this occurs, tax-sheltering and other frowned-upon things happen within an economy. But back to the Big 1980s. To make LBOs viable, the market needed a financing instrument. A clever MBA, Michael Milkin, popularized one: the junk bond, which is a high-yield bond with a high default risk. Hence, the government created the preconditions for the emergence of Milken, also known as the junk-bond king, and his fellow-travelers. Milken recognized the economic and tax situation and took advantage of it. Those old enough to remember the Milken episode might also recall a lot of the corporate high-yield literature in the 1980s was geared to show the way junk bonds not only paid higher returns, but also had default rates that were historically not much greater than higherrated obligations.

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A company’s stock that is growing earnings and/or revenue faster than its industry or the overall market. hedge fund A fund, usually used by wealthy individuals and institutions, that is allowed to use aggressive strategies unavailable to mutual funds. Includes selling short, leverage, program trading, swaps, arbitrage, and derivatives. They are also exempt from many of the rules and regulations governing other mutual funds. high-yield bonds A debt instrument issued for a period of more than one year with high rates of return because there is a higher default risk. hurdle rate-of-return The required rate of return in a discounted cash flow analysis, above which an investment makes sense and below which it does not. index In economics and finance, an index (for example, a price or stockmarket index) is a benchmark of activity, performance, or evolution in general.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists—because these professions are more immune to randomness. JOHN THE HIGH-YIELD TRADER We met John, Nero’s neighbor, in Chapter 1. At the age of thirty-five he had been on Wall Street as a corporate high-yield bonds trader for seven years, since his graduation from Pace University’s Lubin School of Business. He rose to head up a team of ten traders in record time—thanks to a jump between two similar Wall Street firms that afforded him a generous profit-sharing contract. The contract allowed him to be paid 20% of his profits, as they stood at the end of each calendar year.

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They allowed him, thanks to the leverage (i.e., use of borrowed money), to keep a portfolio of $50 million involved in his trades, with $36 million borrowed from the bank. The effect of the leverage is that a small loss would be compounded and would wipe him out. It took only a few days for the $14 million to turn into thin air—and for John to lose his job at the same time. As with Carlos, it all happened during the summer of 1998, with the meltdown of high-yield bond values. Markets went into a volatile phase during which nearly everything he had invested in went against him at the same time. His hedges no longer worked out. He was mad at Henry for not having figured out that these events could happen. Perhaps there was a bug in the program. His reaction to the first losses was, characteristically, to ignore the market.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

Many observers consider the issue of the true risk level of junk bonds to be unresolved, although in recent years, low default rates for junk bonds has tilted investor opinion in favor of the junk-bond sector (the default rate for junk bonds was 2.2% in 2005, according to Moody’s). as an asset class, high-yield bonds have been embraced increasingly over the year. In any case, insurance companies, pension funds, and especially mutual funds have become big buyers of junk bonds.3 Thrifts, too, have been buyers of junk bonds. Low default rates during much of the 1990s and the early 2000s is one of the reasons for this increased acceptance. Originally, banks provided the bridge financing for LBO deals, but they would do so only if an investment banker had made a firm commitment to underwrite the high-yield bond issue that was to finance the deal long term.

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You have to invest more in credit monitoring, which carries costs; and if one of your shaky issuers goes under, you have to have sold a lot of paper for 25 or 50 bp to recoup the costs and the anguish of resolving that.” Years ago, Drexel was the primary issuer of unrated paper, at one point doing business with 50 to 60 issuers. For dealers involved in the issuance of high-yield bonds, selling unrated commercial paper is a natural offshoot. Risk and Market Liquidity Historically, it has taken a lot to shatter confidence and liquidity in the commercial paper market as occurred, for example, after the failure of the Penn Central. It is notable, for example, that after the stock market crash in October 1987, there was tremendous volatility in the money markets and a marked widening of quality spreads; nonetheless, all sectors of the commercial paper market continued to display tremendous liquidity.

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The risk in providing bridge financing is that, if the junk bonds fail to sell during a specified period, the short-term bridge loan may convert, depending on how it’s structured, into long-term securities conferring equity rights in the LBO; that might leave the lender a reluctant investor. The increased liquidity of the high-yield bond market has reduced this risk in recent years, particularly given the strong demand that mutual funds have shown for new issues. A big part of the debt assumed in an LBO is senior bank debt with a term of around seven years. Banks love this sort of lending for several reasons. They get large origination fees for committing themselves.

file:///C:/Documents%20and%...
by vpavan

As explained above, funds with above-average fees have to show above-average returns, or else their Morningstar ratings will lag behind the funds in their peer group. And that, says Phillips, induces portfolio managers to take greater risks with your money. The Milwaukee-based Heartland Group provides an example of what happens when a fund takes outsized risks with investors' money. Three Heartland bond funds invested in high-yield bonds (read: junk bonds) that were issued, but not guaranteed, by state and local governments for such projects as nursing homes and sewer systems. When the fund needed to sell some of its assets— some projects that the bonds supported defaulted on their interest payments, scaring investors into redeeming shares— the bonds were so illiquid, or thinly traded, that bond dealers demanded extremely high prices to take them off Heartland's hands.

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The 80 percent rule obviously allows a fund to invest up to 20 percent of assets in almost anything. If a fund calls itself the U.S. Government Bond Fund, investors might assume that the assets are rock-solid bonds backed by the full faith and credit of the U.S. Treasury. But that fund portfolio could hold 20 percent of its assets in high-yield bonds, also called junk bonds. One of the collapsed Heartland funds called itself the Heartland Short Duration High-Yield Municipal Bond Fund. Investors may have been fooled by the term "municipal," which to many connotes safety and security. But few of Heartland's bonds were actually guaranteed by the government units that issued them.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

High Opportunity Bonds In August 1985, Forbes argued that Milken had “created his own universe.”23 With great tenacity, an endless appetite for work, and a monomaniac focus, Milken was “an amazing salesman” of junk bonds.24 He disliked the term “junk,” preferring high opportunity bonds. They would eventually become high yield bonds. At the University of Pennsylvania’s Wharton Business School, Milken came across the work of W. Braddock Hickman. In his 1958 Corporate Bond Quality and Investor Experience, which sold 934 copies, Hickman’s laborious precomputer analysis showed that lower rated bond issues that paid high rates of interest to compensate for the higher risk were safer and had lower rates of default than previously thought.

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Jay Higgins, head of mergers and acquisitions at rival Salomon Brothers, observed: “Big companies used to worry only about threats from other big companies. But with Drexel doing the financing, anybody long on ideas and short on capital is a threat.”31 Drexel moved from providing advice to bankrolling transactions as a principal. The raiders, leveraged buyout funds, and investors met at the annual Drexel’s High Yield Bond Conference to raise money for new deals. Held at the Beverly Hills Hotel, owned by Ivan Boesky, an investor specializing in risk arbitrage (betting on outcomes of mergers and acquisitions), the Predator’s Ball was the bacchanalian centrepiece of the world of hostile takeovers and debt. Milken always opened the conference with a simple statement: “There’s $3 trillion in this room.”

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Braddock, 143 Hidden Persuaders, The, 43 Higgins, Jay, 146 High Grade Structured Credit Fund, 204 High Grade Structured Credit Strategies Enhanced Leverage Fund, 191 High Grade Structured Credit Strategies Fund, 191 high opportunity bonds, leveraged buyouts (LBOs), 143 High Street, 80. See also New York High Yield Bond Conference (Drexel), 146 high-risk mortgages, 196. See also mortgages Hilibrand, Lawrence, 248 Hilton Hotels, 162 Hirst, Damien, 323, 338 Ho, Karen, 313 Hockne, David, 75 Hoffman, Dustin, 308 Holidays in Hell, 293 home equity, 45 credit cards, 72 Honda, 56 Hong Kong as a financial center, 78, 82 and Shanghai Bank, 202 Hoover, Herbert, 102, 359 hospitals, 158 hostile bids, leveraged buyouts (LBOs), 149-150 hostile takeovers, 57 Rio Tinto, 59 hot hedge funds, 245 Hotel New Hampshire, The, 29 Household Finance, 202 housewife traders, 40-42 housing market, 179-182 adjusted rate mortgages (ARMs), 183-184 prices, 337-338 Houston Natural Gas, 55 Howard, Alan, 261 Huc-Morel, Nicolas, 229 Hughes, Robert, 324 Hume, David, 126 Hundi, 22 Hunter, Brian, 227, 250 Hurricane Katrina, 251 Hussein, Saddam, 282 hustle as strategy, 312 Hustler, 344 hybrid capital, 280 hyperinflation, 22 I I Like Stocks, 40 i-banks, 76.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

The expected returns from stock prices had trouble matching these bond rates; money flowed into bonds while stock prices fell sharply. Finally, stock prices reached such a low level that a sufficient number of investors were attracted to stem the decline. Again in 1987, interest rates rose substantially, preceding the great stock-market crash of October 19. To put it another way, to attract investors from high-yielding bonds, stock must offer bargain-basement prices.* On the other hand, when interest rates are very low, fixed-interest securities provide very little competition for the stock market and stock prices tend to be relatively high. This provides justification for the last basic rule of fundamental analysis.

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Thus, even if 2 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio. Thus, many investment advisers have recommended well-diversified portfolios of high-yield bonds as sensible investments. There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts. The junk-bond naysayers point out that lower credit bonds are most likely to be serviced in full only during good times in the economy.

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

Citing the academic studies he had come across while studying for his MBA at Wharton, Milken argued that bonds of lesser credit quality were unnecessarily shunned in the marketplace and therefore presented intriguing opportunities for investors. He tirelessly preached the gospel to insurance companies, pension funds, and newly deregulated savings and loans. According to Milken, and a growing legion of believers who accepted his argument, a diversified portfolio of high-yield bonds would, over time, yield a significantly higher return (even allowing for the greater possibility of default) than would a portfolio of investment-grade bonds. An early Wall Street Journal article about Milken noted the daring mixed with his shyness and self-effacement and went on to declare that “Mike Milken … is undisputed king of the junk bond market.”

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Mitchell Panhandle Refining Company panics; of 1792; of 1857; of 1873; of 1901of 1907; see also crashes Pannemaker, William van peace rumor scandal (1916) Penn Central Railroad pension funds; beta management of; performance of; portfolio diversification of; portfolio insurance for; regulation of; share of market of Pepsi performance funds Perkins, George Perot, H. Ross Pfizer Phelan, John J. Philadelphia Federal Reserve Bank Pierce, E. A., & Company Pier One Polaroid Pond Coal Company pools; bankers’; outlawed Porter, Sylvia portfolios; “baby,” ; diversification of; of high-yield bonds; insurance of; liquidation of, during bear markets; mutual fund; pension plan; “replicating,” ; risk-efficient Pratt, Serano preferred stock present value, determination of Price, T. Rowe, Jr. Price, William W. price-earnings (P/E) ratios; during boom of 1920s; and crash of 1929; and crash of 1962; interest rates and; of IBM; of Nifty Fifty; postwar; during recession-depression of 1920–21; during recession of 1970s; rise in, during 1950s; of S&P; during World War I; during World War II Princeton University probability theory Procter & Gamble Produce Exchange productivity, increase in program trading progressive politics Prohibition Prudential Prudent Man Rule Public Broadcasting System (PBS) Pulitzer, Joseph Putnam, Samuel Radio Corporation of America (RCA) railroads; bankruptcy of; see also specific railroad companies “random walk” concept Reagan, Ronald recessions; of 1920–21; of 1950s; of 1970s; of 1982 Remington Rand Republican Party repurchases retirement plans; regulation of Revenue Act (1942) Revlon Rinfret, Pierre risk arbitrage risk-reward relationships “robber barons,” Robbins, Lionel Roberts, Harry Robinson, James Harvey Rockefeller, John D.

Palace Coup: The Billionaire Brawl Over the Bankrupt Caesars Gaming Empire
by Sujeet Indap and Max Frumes
Published 16 Mar 2021

No longer were private equity firms condemned as savages; rather they were earnest entrepreneurs, builders of businesses, and saviors of pensioners. The distressed debt hedge fund now filled the pirate caricature on Wall Street. The invention of the junk bond had fueled the takeover mania of the 1980s. High yield bonds—or junk—allowed small or risky companies, along with buccaneering raiders, to tap the capital markets from which they had otherwise been closed off. As those deals went bust in the early 1990s, the debt became “distressed,” and the “vulture” investor was born. Vulture funds could scoop up the debt of troubled companies for nickels and dimes and take control of over-indebted but otherwise viable companies.

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When the private equity owners of PetSmart and Neiman Marcus replicated this maneuver, the industry publication Covenant Review would popularize a new term: that these copycats were “pulling a J.Crew.” “Pulling a J.Crew” exploited weak or non-existent covenants that were commonplace in debt documents. Credit funds, desperate for high-yielding paper, had little ability to push back on borrower-friendly terms. Trillions of dollarsworth of high-yield bonds and leveraged loans, the riskiest types of corporate credit, that are now outstanding. Most credit documents now allow for the removal of collateral or create vulnerability to get pushed down by other debt. US leveraged loan issuance, whose annual volume topped $1 trillion in recent years, was increasingly driven by complex “securitizations,” where dozens of bundled loans were bought up by insurance companies and banks.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

Amazingly enough, the average returns of LTCM were 27.76% (net of fees), and 37.45% gross with a volatility of 8.96%. The S&P 500 average annual return was 22.25% with a volatility of 11.48%. Even through one of the hottest bull markets ever, this fixed-income money tree left the S&P 500 in the dust.10 Continue the comparison across a host of major asset classes high-yield bonds, real estate, gold, silver, world bonds, or world equity and the story is the same. The LTCM money tree was the best deal around. More than that, LTCM added diversification to many investors’ holdings. The LTCM portfolio had a low correlation to many standard asset classes that an investor might already hold.

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They were hopelessly out of their league, doing things that your mother would have told you were just plain stupid.3 —Jim Cramer, September 28, 1998 (Cramer 2008) From August 17, 1998, to September 21, 1998, LTCM’s daily losses were uncorrelated with Russian stock returns, Japanese stock returns, U.S. Treasury returns, U.S. high-yield bond returns, world bond returns, and mortgage bond returns. LTCM’s total losses from directional trades in emerging markets reached $278 million (Table 5.1), a small fraction of its total losses. LTCM’s losses had nothing to do with massive Russian exposure. Were LTCM’s losses generated by the Salomon arbitrage trading group’s shutdown?

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Preferred investors remained in the fund after the forced distributions and consequently lost more when the crisis hit.2 The median investor had a 19% annualized return from LTCM’s inception until its close. By comparison, the S&P 500 had an annualized return of 25%, a treasury bill index returned 5.1%, a 10-year government bond index returned 7.8%, a high-yield bond index returned 8.4%, gold returned −5.5%, a world equity index returned 16.4%, a world bond index returned 7.1%, an emerging equity index returned −4.8%, and an emerging bond index returned 11.2%.3 The median investor did reasonably well, compared to other investment alternatives. UBS lost a great deal in LTCM’s failure.

Your Money: The Missing Manual
by J.D. Roth
Published 18 Mar 2010

In his book Your Money and Your Brain, Jason Zweig notes, "Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses. Hot performance comes and goes, but expenses never go away." Zweig offers the following suggestions: Don't buy a government bond fund with annual expenses over 0.75%. Don't buy a blue-chip U.S. stock fund with annual expenses over 1.00%. Don't buy a small-stock or high-yield bond fund with annual expenses over 1.25%. Don't buy a foreign-stock fund with expenses over 1.50%. You can keep things simple by sticking to index funds with expense ratios below 0.50% (or even better, below 0.25%). And avoid buying a mutual fund with a load, or sales charge (basically, a commission).

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helping others donating to charity, Donating to Charity encouraging in children, Allowances feeling rich and, Leading a Rich Life on a Budget happiness and, Living a Rich Life yoga of money, Allowances, True Wealth, Church, Charity, and Community, True Wealth high-interest savings accounts, Establish an Emergency Fund high-yield bond funds, Keep Costs Low hobbies, Maximum Fun at Minimum Cost, Money-Making Hobbies home equity loans and lines of credit (HEL, Other approaches, Saving Money through Regular Maintenance home offices, Other moves homeowners associations (HOA), Shopping smart homeowners insurance, Homeowners Insurance hometown vacations, Hometown Vacations, Cash Is King, Cash Is King hospitality exchanges, Travel for the Adventurous house swapping, Hometown Vacations household accounts, The Importance of Teamwork, Joint or Separate Finances?

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
by Steven G. Mandis
Published 9 Sep 2013

Certain Goldman client-oriented sales and trading desks had “proprietary trading” operations. They got to see client order flow, but theoretically they existed to provide liquidity or “facilitate client trades.” This was prevalent in less liquid, more opaque products and desks, especially fixed-income securities like high-yield bonds, where it may not have been easy to immediately match a buyer and a seller. It was also prevalent in relatively lightly regulated markets such as foreign exchange. Generally, proprietary trading on client-oriented sales and trading desks was less frequent in highly transparent and highly regulated areas such as equities.

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The Berlin wall falls, igniting global expansion for American businesses (C, O). 1990: Bob Rubin and Steve Friedman take charge as co-senior partners and co-chairs of the management committee, expanding global operations and seeking other opportunities for growth, including proprietary trading (O, C). They make partners’ compensation more dependent on performance than on tenure, and they initiate the firm’s first lateral hiring initiatives (O, C). High-yield bond investors threaten to boycott Goldman after accusations that GSAM and Goldman improperly used proprietary information gained in its underwriting role (O, C); Cooperman is forced to change GSAM’s strategy to focus on mutual fund sales to individual investors rather than institutional clients. Drexel Burnham Lambert, once the fifth-largest US investment bank, is forced into bankruptcy in February. 1991: Goldman’s management committee again studies the option of going public but drops the idea before the proposal can be put before the partnership (C, O).

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

Brookings Papers on Economic Activity, 2, pp. 137–189. Friedman, Milton and Anna Schwartz. 1991. “Alternative Approaches to Analyzing Economic Data, Appendix.” American Economic Review, Vol. 81, No. 1 (March), pp. 48–49. Fridson, Martin S. 1990. “Applying Contemporary Analytical Techniques to the High-Yield Bond Market.” Conference on High-Yield Bonds: Analysis and Risk Assessment, Frank Reilly, ed. Charlottesville, VA: Institute for Chartered Financial Analysts, July 15. Fortune, Peter. 1989. “An Assessment of Financial Market Volatility: Bills, Bonds, and Stocks.” New England Economic Review, November/December, pp. 14–28.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

The expected returns from stock prices had trouble matching these bond rates; money flowed into bonds while stock prices fell sharply. Finally, stock prices reached such a low level that a sufficient number of investors were attracted to stem the decline. Again in 1987, interest rates rose substantially, preceding the great stock-market crash of October 19. To put it another way, to attract investors from high-yielding bonds, stock must offer bargain-basement prices.* On the other hand, when interest rates are very low, fixed-interest securities provide very little competition for the stock market and stock prices tend to be relatively high. This provides justification for the last basic rule of fundamental analysis: Rule 4: A rational investor should pay a higher price for a share, other things equal, the lower the interest rates.

…

Thus, even if 1 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio. Many investment advisers have therefore recommended well-diversified portfolios of high-yield bonds as sensible investments. There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts. The junk-bond naysayers point out that lower credit bonds are most likely to be serviced in full only during good times in the economy.

Capital Allocators: How the World’s Elite Money Managers Lead and Invest
by Ted Seides
Published 23 Mar 2021

” – Scott Kupor “Private equity is changing from GPs as the sun of the solar system and everything revolving around them, to entrepreneurs being the sun of our solar system where we are just one of many planets.” – Mike Mauzé Other assets “We don’t invest in asset classes; we invest in people.” – Tom Lenehan “To be a growth investor, you have to be optimistic about the future. Optimists are the ones who ultimately get it right.” – Paul Black “Buying high-yield bonds is like shopping at the mall. You know what you’re looking for and what you’re going to buy. Structured credit is like going to a Turkish bazaar. You show up with money and you look around. You have to have an open mind to see the one valuable vase that no one else sees, and then be ready to buy it

Financial Independence
by John J. Vento
Published 31 Mar 2013

Here, we start with the sample investment model 1, conservative bond income, with 15 percent allocated to fixed high-yield bonds, 35 percent allocated to fixedincome investment-grade bonds, and 50 percent to fixed-income short-term and money-market. After year 1, the initial asset allocation percentages have changed because of the performance of each asset class. In order to rebalance and put your model back to its original allocation, you would be required to purchase $1,875 of fixed-income short-term bond mutual funds and money-market and you would have to sell $788 of fixed-income investment-grade bond mutual funds and $1,088 of fixed-income high-yield bond mutual funds. This would take you back to your original percentage allocation.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
by John C. Bogle
Published 1 Jan 2007

During the 15-year period from 2001 to 2016, the performance of the bond indexes is also impressive, outpacing an average of 85 percent of all actively managed bond funds in the six categories—short-term, intermediate-term, and long-term bond funds grouped by both U.S. government and investment grade corporate sectors (Exhibit 14.1). The appropriate indexes also outperformed the managers of municipal bond funds (84 percent) and high-yield bond funds (96 percent). The important role of costs in shaping bond fund returns. EXHIBIT 14.1 Percentage of Actively Managed Bond Funds Outperformed by S&P Indexes, 2001–2016 Fund Category U.S. Government Investment Grade Short-term bonds 86% 73% Intermediate-term bonds 82 73 Long-term bonds 97 97 Average 88% 81% The average shortfall in the returns of intermediate-term and short-term Treasury and corporate bond funds relative to index funds during the past 15 years is estimated by SPIVA to be about 0.55 percent per year.

Company: A Short History of a Revolutionary Idea
by John Micklethwait and Adrian Wooldridge
Published 4 Mar 2003

At Safeway, for instance, where the company motto had been “Safeway offers security,” 63,000 people lost their jobs.17 LBOs, in turn, relied on another Wall Street invention: “junk bonds.” Wall Street had always traded bonds in distressed companies. The genius of Michael Milken was to create bonds specifically for this “non-investment-grade” market, opening up the market to ventures that were too small or risky to issue regular bonds. Milken first began to push his “high-yield” bonds in the 1970s; by the 1980s, his firm, Drexel Burnham Lambert, dominated the junk-bond market, and his annual Predators Ball in Los Angeles had become a fixture for entrepreneurs and politicians. In 1982, President Reagan made Milken’s job a little easier by allowing banks and, crucially, savings and loan institutions to buy corporate bonds.

Global Financial Crisis
by Noah Berlatsky
Published 19 Feb 2010

And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late. The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion—including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans—is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages. 220 Solutions to the Global Financial Crisis Last year [2008] we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion.

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis
by Stephen Leeb and Donna Leeb
Published 12 Feb 2004

Regular bonds will come down less, and they’ll still give you income. Individual bonds generally aren’t as liquid as stocks, and sometimes you can be forced to overpay for them. Thus, when it comes to investing in any fixed income instrument as a deflation hedge, we prefer the mutual fund route. One key rule is to go for quality. Don’t get tempted by high-yield bond funds, because these consist of the debt of risky companies, exactly the kind that could go broke if a depression hits. Stick to government bonds and ultra-high-quality corporate bonds. For regular bonds, our first choice is the Fidelity Investment Grade Bond Fund (1-800-544-8888), a well-managed fund that invests in high-grade bonds.

Electronic and Algorithmic Trading Technology: The Complete Guide
by Kendall Kim
Published 31 May 2007

At the time of its launch, U.S. broker-dealers were required to provide NASD transaction information on bonds sold or bought within a 75-minute time frame. Beginning in July 2002, the NASD publicly disseminated that information in near-real time for 500 eligible investment-grade corporate bonds and for 50 high-yield bonds. Phase 2 of the TRACE rollout began in March 2003 when the NASD 3 The Bond Market Association, ‘‘eCommerce in the Fixed-Income Markets: The 2003 Review of Electronic Transaction Systems,’’ http://www.bondmarkets.com/assets/files/ ets_report_1103.pdf. Electronic and Algorithmic Trading for Different Asset Classes 121 publicly disseminated single-A and better bonds with an initial issuance size of $100 million.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

There is considerable variation in the yield spreads on junk bonds; a typical spread might be about 5% over Treasuries, but, as we saw in the case of the LifeCare bond, spreads can go skyward as companies approach distress. Remember these are promised yields and companies don’t always keep their promises. Many high-yielding bonds have defaulted, while some of the more successful issuers have called their debt, thus depriving their holders of the prospect of a continuing stream of high coupon payments. So while the promised yield on junk bonds has averaged 5% more than yields on Treasuries, the annual return since 1980 has been less than 3% higher.

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To guard against such dangers, debt issues may restrict the amount that the company may pay out in the form of dividends or repurchases of stock.21 Take a look at Table 24.2, which summarizes the principal covenants in a large sample of senior bond issues. Notice that investment-grade bonds tend to have fewer restrictions than high-yield bonds. For example, restrictions on the amount of any dividends or repurchases are less common in the case of investment-grade bonds. These debt covenants do matter. Asquith and Wizman, who studied the effect of leveraged buyouts on the value of the company’s debt, found that when there were no restrictions on further debt issues, dividend payments, or mergers, the buyout led to a 5.2% fall in the value of existing bonds.22 Those bonds that were protected by strong covenants against excessive borrowing increased in price by 2.6%.

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C1–C2. 4This view persists in some quarters: in April 2005, Franz Müntefering, Chairman of the German Social Democratic Party, branded private-equity investors as a plague of “locusts” bent on devouring German industry. Try an Internet search on “private equity” with “locusts.” 5See E. I. Altman and G. Fanjul, “Defaults and Returns in the High Yield Bond Market: The Year 2003 in Review and Market Outlook,” Monograph, Salomon Center, Leonard N. Stern School of Business, New York University, 2004. 6There are some tax costs to LBOs. For example, selling shareholders realize capital gains and pay taxes that otherwise would be deferred. See L. Stiglin, S.

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

“But we have a lot of talented guys around here.” The Times article made the point that Smeal had improved the division since he took it over but there was plenty of work still to be done, as Goldman badly lagged Salomon Brothers and other fixed-income powerhouses in the often-lucrative issuance of both mortgage-backed securities and high-yield bonds. Others thought Smeal had done a lousy job at making Goldman competitive in fixed income. Friedman recalled “talking to a guy who was a heavy partner at Salomon Brothers” who told him, “I hate competing with you guys in the merger area. I really hate it. You have your act together and you’re able to get your firm organized in this area.

…

He was especially concerned that there was “no brainpan” to deal with what they both quickly discovered was a major problem right from the start. “The top of that division was an intellectual vacuum,” he said. The fixed-income division traded nearly every debt-related security available, including government bonds, high-grade corporate bonds, high-yield bonds, and mortgage-backed securities. “The business was big, with a lot of risk,” Rubin explained. Much to their surprise, Rubin and Friedman discovered that Goldman’s “traders had large, highly leveraged positions, many of them illiquid, meaning that they couldn’t be sold even at generous discounts to the price of the last trade,” he continued.

…

Johnson & Johnson Joint Chiefs of Staff Jonas, Nathan Jonas, Ralph, 2.1, 2.2, 2.3, 2.4, 2.5 Joseph, Fred Journal Company Journalist and Financial Reporting, 11.1 JPMorgan, prl.1, 2.1, 14.1, 18.1, 18.2, 20.1, 22.1 Goldman Sach’s proposed merger with, 16.1, 16.2 investment trust of World War I funds raised by, 1.1, 2.1 J. P. Morgan building JPMorgan Chase Bear Stearns’s merger with, prl.1, 22.1 Glass-Steagall’s effect on TARP funds repaid by J. S. Bache & Co. junk (high-yield) bonds, 2.1, 10.1, 10.2, 12.1, 15.1 Justice Department, U.S., 4.1, 5.1, 5.2, 6.1, 7.1, 18.1, 24.1 Wall Street firms sued by, 4.1, 8.1 Kaden, Lewis, 7.1, 13.1 Kahn, E. J., Jr., 3.1, 3.2, 3.3, 4.1 Kalb, Richard Kamehameha I, King of Hawaii Kamehameha Schools Kamp, Charlotte Kaplan, Gilbert, 7.1, 8.1 Kaplan, Robert, 14.1, 17.1 Katz, Robert, 14.1, 14.2, 16.1 Friedman’s succession and, 14.1, 14.2, 14.3 Kaufmann, Edgar Kaufmann, Edgar, Jr.

Rigged Money: Beating Wall Street at Its Own Game
by Lee Munson
Published 6 Dec 2011

You need not impress anyone. The Audit Part III: Junk Is Garbage Just because an ETF exists doesn’t mean you should invest in it. To add injury to insult, some parts of the market, even well-known areas like junk bonds, can fail to translate into a successful ETF. SPDR Barclays Capital High Yield Bond ETF (JNK) may be the worst bond strategy of all time. Now that I have your attention, let’s break down the major issues with junk bonds, and more specifically ETFs that trade baskets of those bonds. Don’t worry, there is a place for these ugly ducklings, but they are not for those trying to get fixed income risk and return.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

But this is a genuine risk-transfer instrument: if they are triggered, investors really aren’t getting their money back. The second is that the market has some built-in safeguards against runaway growth. Growth is not a bad thing. But out-of-control growth usually has an unhealthy effect on pricing. This is true across financial markets, from mortgage-backed securities before the bust to high-yield bonds in the years succeeding it. Mispriced risk could lead to a nasty surprise for investors in the event of a really big natural disaster—the $100–$200 billion catastrophe that has yet to strike but could if, for example, a big earthquake struck a major city directly. Nonetheless, the market is unlikely to grow too big too quickly.

The Money Machine: How the City Works
by Philip Coggan
Published 1 Jul 2009

Later on, Milken played a key role in the takeover boom of the 1980s, financing predators with newly created ‘junk bonds’. These would trade at, or near, face value, but would offer much higher yields than other bonds in the market (to reflect the higher risk). The term junk bonds extended to cover all high-yielding bonds of this type. Milken fell from grace and was eventually jailed, and many investors who bought junk bonds at the peak of the market lost money. As with other financial theories, by attempting to exploit it so heavily, Milken and his followers altered the rules. If there was any merit to the junk bond theory, it was because few people bothered to follow the market and it was therefore possible to find bargains.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

Japan, following its financial bust after the Japanese real estate and stock market bubble burst at the beginning of the 1990s, was the first country to experience ultra-low, or near-zero, interest rates. In the earlier years of the rise of the currency carry trade, it was very much the yen-funded carry trade that was dominant. The notion of a carry crash suggests collapsing values of high-yield bonds and currencies and soaring volatility. This much is true. But for currency carry trades, there are two sides to a currency exchange rate, and if a carry crash means a crash of carry recipient currencies, it is also likely to mean a “melt-up” in the value of the funding currency. The first true example of this was the melt-up of the yen that occurred in early October 1998, at the end of the Asia and Russia crisis and following the collapse of giant hedge fund Long-Term Capital Management (LTCM).

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader
by Colin Lancaster
Published 3 May 2021

It’s willing to be a loss leader to win the war. Oil is indicated to open below $32 a barrel tomorrow, a fucking 30% move down from where it closed on Friday. It’s full-on ape-shit bad in the markets. People are losing their fucking shirts. Everything is blowing out. US stock futures are limit down, high-yield bonds are gapping wider, ten-year Treasury yields dipped below 0.5%. We had flash crashes in currencies overnight as the oil market crash sent shockwaves through the FX markets. CAD, MXN, RUB, NOK, and ZAR are all getting killed. Adding a bit of credit risk to the overall picture is the worst thing possible.

740 Park: The Story of the World's Richest Apartment Building
by Michael Gross
Published 18 Dec 2007

At the same time, thanks to a young investment banker named Michael Milken at the firm Drexel Burnham Lambert, Saul found his way back to the cutting edge of finance. Saul’s specialty wasn’t really computers; it was investing. He was always on the hunt for new opportunities. In 1973, Milken had begun touting non-investment-grade bonds, also known as high-yield bonds, and later junk bonds, that paid exorbitant interest on what most investors saw as huge risks. Saul’s holding company, now called Reliance Group, became one of Milken’s first buyers—and a borrower, too. By 1975, Reliance was taking huge tax write-offs on its obsolete computers and had canceled dividend payments for two years.

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Nonetheless, Saul believed that he had changed the face of American wealth, just as they’d taught him he could at Wharton. The Philadelphia Inquirer’s Joseph DiStefano quotes Saul telling an unnamed business partner at the time, “You’d be a billionaire, too, if you were Jewish.” IN FACT, STEINBERG’S GLORY DAYS WERE ALMOST OVER. WITH HIS JUNK-BOND buddies in jail, the high-yield bond market collapsing, and new regulations making takeovers harder, Saul had decided to dedicate himself to the insurance business. He began reorganizing Reliance and developed risky new products like nuclear plant insurance to raise revenues. But by the summer of 1990, regulators were trying to tame Reliance, too.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

It appears that prices were set by reference to custom, bearing little relation to the cost of production. Why else would the price of an identical service, involving many of the same people, be less in smaller, diverse and more complex European and Asian markets than in the United States? Why else would the price of issuing high yield bonds, which many consider to be quasi-equity, be half the equity equivalent? Why else would American IPO spreads have clustered round the 7 per cent figure? The explanation is unlikely to be explicit collusion, which would be simply too risky. Conspirators would be too fearful of the word leaking out and of the serious consequences.

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

A cigar Event-Driven Investing203 butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit.” — Warren Buffett, Berkshire Hathaway 1989 shareholder letter The distressed-asset universe is huge and spans all kinds of below-­ investment-­grade debt securities. These investments may include high-­ yield bonds, below-par distressed bank loans, debtor-in-possession loans, credit default swaps, preferred stock, common stock, warrants, and real estate assets. Distressed-asset investing tends to perform best during bull markets, when investors make money on the turnaround on investments made during the preceding economic downturn.

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
by Jason Kelly
Published 10 Sep 2012

The high-yield (meaning high interest paying) market is something of a catchall term for debt that is non-investment grade. Because of that grade (given by credit rating agencies), investors demand to be compensated for the additional risk through more yield (interest) than they’d get from safer bonds issued by investment grade companies or the government. High-yield bonds are more colloquially called junk bonds. During 2005 through 2007, the high-yield debt market was perfectly situated for the purposes of leveraged buyouts. Investors were eager to invest in debt vehicles like collateralized loan obligations (CLOs), which were assembled by banks by piecing together lots of loans and then dividing them into slices according to risk.

The Enablers: How the West Supports Kleptocrats and Corruption - Endangering Our Democracy
by Frank Vogl
Published 14 Jul 2021

He played leading roles in restructuring the debts of Latin American countries as they defaulted one after another in the 1980s, he predicted the Asian financial crisis in the late 1990s, and he issued warnings of financial crisis ahead in early 2007 and again in early 2008. We have worked together over many years and he has long argued in articles, TV interviews, and speeches that the ever-increasing determination of investors to pile into high-yielding bonds issued by high-risk governments is bound to end in disaster. For a long time, he was a lone voice of caution and reason.13 Greed trumps reason, however, in the sovereign debt markets. I really felt like saying to investors and bankers “serves you right,” when I read a story in the Financial Times in August 2020 (after President Lukashenko of Belarus rigged the elections and sparked huge public protests) that read in part: “Investors in Belarus’s sovereign debt are growing jittery about the threat of international sanctions against the country in the wake of last Sunday’s disputed election.”14 Of course investors and bankers oppose sanctions; after all, they want their money.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues
by Alain Ruttiens
Published 24 Apr 2013

In case the market considers some possible default occurrence, the market bond price will be lowered accordingly: Since the coupon remains unchanged, there is no compensation for increasing default risk, what justifies such a lower bond price. Example. The case of a Greece government bond is shown in Figure 13.1. Figure 13.1 Greece government bond 2009–2011 2. A low rating issuer can issue a bond at par, provided he is paying a higher coupon (hence the name of “high yield bond”), in compensation for the risk supported by the bond investor: and, as long as the risk remains more or less stable, the bond price will be in line with risk-less bond prices. But if later on the credit risk presented by the issuer is changing (worsening or improving), the market bond price with move according to changes in the market view for the risk premium, since the coupon remains fixed.

Liar's Poker
by Michael Lewis
Published 1 Jan 1989

"But who else?" "There is a deal you should have a look at," I began, measuring each word. "It's extremely popular with American investors." (My Frenchman was intensely suspicious of anything popular.) "Then we shall let them buy it all," he said, having caught on. "I'm sitting here with one of our high-yield bond specialists, who thinks Southland bonds are cheap," I continued. "But you don't," he said, and laughed. "Right," I said, and then launched into a long-winded sales pitch that greatly pleased both the junk bond man from Salomon and my customer, though for different reasons. "No, thanks," said my Frenchman at the end of it.

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World
by Sandra Navidi
Published 24 Jan 2017

The tale of junk bond king Mike Milken is one of triumph, tragedy, redemption, and comeback. In the Gordon Gekko-ish 1980s, this ingenious financier revolutionized the financial system by opening up capital markets to companies which had previously not been considered creditworthy. He created a market and channeled billions of dollars into companies by issuing high-yield bonds, also dubbed junk bonds. So great was the boom he created that at some point it exceeded the financing of investment-grade companies. Born into a middle-class family in California, by the mid-1980s Milken had become a billionaire. However, in 1986 this steep ascent came to a screeching halt when he became entangled in a federal insider trading investigation and eventually pled guilty to six breaches of securities law.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

However, less commonly, the phrase can also be used to describe the manner in which the structure of a CDO, or other derivatives, magnifies investor exposure to price swings. Leverage Ratio: Most commonly used to describe the ratio between equity and debt, or earnings and debt, in relation to a CDO or company. Leveraged Finance: Funding for companies that carry a rating below investment grade. It included high-yield bonds (bonds to companies rated below investment grade) and leveraged loans (loans to the same category of companies.) In this decade it was widely used to fund private equity bids, also known as “leveraged buyouts.” Liquidity: The degree to which assets can be traded freely or not. Monoline: A specialist bond insurance company that insures investors against the default of municipal government bonds, structured credit, and other assets.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

Credit ratings are typically an alphanumeric code ranging from extremely high credit quality (typically AAA or Aaa) to already in default (D). The two major grades of bonds are investment grade and high yield. d Investment grade bonds are generally low risk and suitable for investors who are not going to spend much time looking into the risks of their investments (like widows, orphans, and retirement accounts). High‐yield bonds are typically much riskier than investment grade bonds. However, they generally pay much higher coupon rates to investors. (See Figure 9.5, Bond Ratings.) These ratings can be converted into default probabilities using transition rates published by bond ratings agencies. Transition rates indicate the likelihood that bonds at one credit rating will migrate to another credit rating over some timeframe.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them
by Nouriel Roubini
Published 17 Oct 2022

Cash flow at nearly 17 percent of the world’s forty-five thousand public companies could not meet interest costs over three years through 2020, according to data reported by FactSet.4 Indeed, given cheap borrowing costs, thanks to central banks’ unconventional policies, many corporate firms—already highly indebted—borrowed more during the COVID-19 crisis and became bigger zombies. Their overborrowing came home to roost in 2022. Monetary policy tightening by the Fed sharply increased the spread that “high yield” bonds paid relative to safe bonds, thus vastly increasing the borrowing costs of leveraged firms that rely on “junk” bonds. Then, defaults started to increase. Bailing out zombies just delays inevitable bankruptcy, which is good news only for the lawyers charging by the hour. At some point, MegaCorp will face a bankruptcy and restructuring.

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram Rajan
Published 24 May 2010

As my colleague Richard Thaler has argued, when gamblers win money, they take more risks, because they treat their earlier winnings as “house” money—not their own—and therefore less important if lost. Whatever the reason, with investors more willing to take risks, the risk premium on all manner of assets came down. One effect of the search for yield was that money moved out of the United States into other countries, especially into the high-yielding bonds, stocks, and government securities in developing countries. But many of these countries were fearful of losing out in the race to supply goods to the U.S. market. Their central banks intervened to hold down the value of their currency by buying the U.S. dollars that were flowing into their countries from the domestic private entities that had acquired them and reinvesting these dollars in short-term U.S. government bonds and agency bonds.9 Thus, even as the Fed pushed dollars out, central banks in developing countries pushed them back in.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

Attorney’s Office for the Southern District of New York (led by Rudy Giuliani) launched investigations of Milken and Drexel Burnham Lambert for insider trading, securities manipulation, and fraud. The investigations eventually led to convictions for both Milken and his employer for securities and reporting violations.66 But junk bonds—rebranded as “high-yield” bonds—remained a popular form of financing, with over $600 billion in new bonds issued by U.S. corporations from 2003 through 2007.67 Equally important, investor demand for higher-yield, higher-risk bonds remained strong—driving the recent boom in mortgage-backed securities, especially as returns on Treasury bonds fell to historic lows in the past decade.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

Corporate bonds may have fallen to junk status due to a deterioration in the issuer’s financial performance. Junk bonds pay a high yield to compensate lenders for the credit risk of the issuer, just as banks lend on credit cards at a rate reflecting default experience. Their promoters call them high-yield bonds. Junk bonds from two companies that have the same yield may perform differently. Various forms of junk bond have been used to finance takeovers, and the product has a poor reputation. Junk bonds are not acceptable as collateral for repo trades (see Chapter 11). Credit rating agencies The credit rating agency rates the creditworthiness of a bond.

The Dealmaker: Lessons From a Life in Private Equity
by Guy Hands
Published 4 Nov 2021

Then I sold the coupon payments to institutions. The margins I made were extraordinary and I’m glad to say that V-Nee, years later, got his principal payments. By my calculation, he would have made close to $500 million for his investment of just a few million. Such is the power of compound interest on high-yielding bonds over thirty years. These were some of the happiest days of my working life. I felt I had been spinning a thousand plates in the air at Oxford so, to begin with, becoming an employee at Goldman Sachs was like a holiday. Whereas everyone else was complaining about how hard they were working, I was enjoying a decent (if short) night’s sleep, a predictable pay cheque at the end of each month, my lunch paid for, an annual bonus and paid holiday.

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

The power of innovative institutions to change markets is clear from just a few examples, which Merton and Bodie place under the heading of “the financial innovation spiral.” Money market funds now compete with banks and thrifts for household savings. Securitization of auto loans and credit card receivables has intensified competition among financial institutions as sources for these purposes. High-yield bonds have liberated many companies from the icy grip of their commercial bankers. In national mortgage markets, many institutions have developed into major alternatives to thrifts as a source for residential mortgages. These institutional innovations have improved the lot of consumers and business firms by reducing the costs of the services they require

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

To avoid a widening rift between the market haves and have-nots, Fed officials recommended that Powell extend the Fed’s lending perimeter to include companies that had been rated triple-B at the time of the Fed’s March 23 announcement. More controversially, they recommended that the Fed purchase ETFs that invest in junk debt because they feared these “high-yield” bonds might buckle, creating a wave of bankruptcies that would cause long-term scarring in the economy. Given the speed with which markets had cracked up in March, Powell decided it was better to err on the side of doing too much than not doing enough. “This is not 2008, 2009. That’s what we kept telling ourselves,” said one high-ranking official involved in the decision.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

Financial Corporation, 83 CNBC, 219, 224 Coca-Cola, 166 Cohen, Abby Joseph, 169 Coke, 151 College, saving for, 240 Commercial paper, 260 Commissions brokers, 195–202 financial advisors, 293–294 impact on investment, 4, 5 mutual fund costs, 94–95 Common Sense on Mutual Funds (Bogle), 224 Common Stocks as Long Term Investments (Smith), 65 Company characteristics cyclical companies and risk, 64, 277-278 default and bankruptcy, 69–70 great company/great stock fallacy, 173–175 quality and returns, 34–38 size and returns, 32–34 stock buy-backs, 55, 60 Compound interest, 4 “Consols,” Bank of England, 14–16, 17, 19 Contrarian Market Strategy: The Psychology of Market Success (Dreman), 87 Cooley, Philip L., 231 Corporate bonds, high-quality, 260 Country club syndrome, 178–179, 187 Cowles, Alfred III, 76-78, 87 Cowles Foundation, 77 Crash, stock market, benefits of, 61–62, 62, 145–148, 160–161 Credit market, historical perspective, 6–7 Credit Mobilier scandal, 145 Credit risk, 13, 69–70 CRSP 9-10 Decile index, 248 CRSP (Center for Research in Security Prices), 88 Cubes ETF, 217, 254 Currency gold vs. paper, 16–18 volatility of, 71 Cyclical companies and risk, 64 DaimlerChrysler, 150 Dallas Morning News, 222 Danko, William, 239 DCA (dollar cost averaging), 282–283 “Death of Equities,” Business Week, 154–157 Death on (amortized) schedule, 230–231, 235 Default rate, companies, 69-70, 150n1 “Defined benefit” plan, 212 Defoe, Daniel, 135 Deutsche Bank, 210 Devil Take the Hindmost (Chancellor), 224 DFA (Dimensional Fund Advisors), 81, 103, 123, 216, 257 Digital Equipment, 151 Dimensional Fund Advisors (DFA), 81, 103, 123, 216, 257 Discount brokerage, 199 Discount rate (DR) and Dow Jones Industrial Average, 48-54 explained, 46–47 Gordon Equation, 53–62 vs. present value, 46–48 stock price, 62–63 “true value” of Dow, 51–53 Discounted dividend model (DDM) Dow Jones Industrial Average, 48–54, 49–50 explained, 43–48 real returns and, 68–69 Disney, 158, 166 Displacement, Minsky’s, 136, 140, 144, 145, 148, 149, 152 Diversification and rebalancing, 287–288 Diversified individual stock portfolio, 99-102 Dividend multiple, 57–58, 60–61 Dividends of Dow, 48-51 Gordon Equation, 54–55 growth and retained earnings, 59–60 and real returns, 67–72 stock market crash, as future possibility, 61–62 Diving engines, mania, 134–135 Dollar cost averaging (DCA), 282–283 Dot-com (See Internet/dot-com) Double dipping (broker), 196 Dow 36,000 (Glassman and Hassett), 53, 264 Dow Jones Industrial Average and discounted dividend model (DDM), 48–54, 49–50 DR [See Discount rate (DR)] Dreman, David, 87 Duke of Bridgewater, 141 Dulles, John Foster, 148 Dunn’s Law, 97–98, 102, 215 Durant, William Crapo, 148 Duration of returns, and retirement planning, 237–239 EAFE (Morgan Stanley Capital Index Europe, Australia, and Far East), 33, 109, 117–119 Earnings expectations of growth stocks, 173–175 retained, 59–60 without dividends, 55 East India Company, 142–143 Easy credit, and bubbles, 136 Econometric Society, 77 Econometrica, 77 Edison, Thomas, 132–133 Edison Electric, 133 Edleson, Michael, 283, 285 Education of brokers, 192, 194–195, 200–201 Efficient market hypothesis, 88 Efficient Solutions (software), 235 Ellis, Charles, 61, 96, 214, 225, 244 EMC Inc., 57 Emergencies, saving for, 240 Emerging markets, 31, 37, 38, 72, 94, 95, 124, 125, 156, 188, 255, 257, 268, 272, 274, 276, 283 England (See Britain) Enron, 161 Entertainment, investment as, 171–172, 183-184 Equities (See Stocks) ETFs (exchange-traded funds), 216, 217, 254, 255 eToys, 57 Euphoria, and bubbles, 136 European interest rates, historical perspective, 8–13 Exchange-traded funds (ETFs), 216, 217, 254, 255 Expected returns growth stocks, 173–175 long-term, 55, 70, 71 myopic risk aversion, 172-173, 184-185 overconfidence, 167–169, 181–183 vs. real returns, 68–69 Expense ratio (ER) in mutual fund costs, 94–95 Expenses (See Fees and expenses) Extraordinary Popular Delusions and the Madness of Crowds (Mackay), 151 Fair value of stock market, 47-53 Fama, Eugene, 37, 88-89, 120-121, 186, 257 Federal Reserve Bank, 146, 152, 159, 176 Fee-only financial advisors, 294 Fees and expenses, 401(k), 211–213 Fees and expenses, mutual funds differences in funds, 209–211 Forbes Honor Roll, 222 front load, 207 index funds, 245, 250, 254 load, 79, 203–205, 216 management fees, 206 no-load, 205–206, 215 Fidelity Capital Fund, 83 Fidelity Dividend Growth Fund, 207 Fidelity Magellan, 91–93, 97 Fidelity mutual funds, 205, 207–209, 210 Fidelity Select Technology Fund, 207–209 Fidelity Spartan funds, 216 Fiduciary responsibility of broker (lack of), 192 Financial Analysts Journal, 244 Financial calculator, 230, 237 Financial goals, 229, 239–240 First Quadrant, 88 Fisher, Irving, 43–48, 56, 229 Folios, 102 A Fool and His Money (Rothchild), 224 Forbes, Malcolm, 87–88 Forbes Honor Roll, 222 Forecasting Cowles and, 76-79, 87 investment newsletters and, 77, 78, 86, 87 Foreign stocks and returns asset allocation in portfolios, 116–120, 255–257, 256 growth vs. value stocks, 36–37 stability, societal, 29–32 tax efficiency of, 264 Fortune, 213, 221 Fouse, William, 95-97 French, Kenneth, 33–34, 35–37, 120 Fuller, Russell, 174 Galbraith, John Kenneth, 148 Gambling, 171–172 Garzarelli, Elaine, 169 GDP (gross domestic product) and technological diffusion, 132-133 GE (General Electric), 33, 244 General Electric (GE), 33, 244 General Motors, 65 Gibson, Roger, 225 Gillette, 151 Glass-Stegall Act, 193 Glassman, James, 53, 264 Global Investing (Brinson and Ibbotson), 225 Global stocks (See Foreign stocks) GNMA fund, Vanguard, 216 Go-Go years (1960-1970), 83, 148–151 Goetzmann, William, 30 Gold, (precious metals stocks), 123–124, 155 Gold mining, 69 Gold standard, 16–18, 145–146 Goldman Sachs Corporation, 147–148, 169 Goldman Sachs Trading Corporation, 148 Gordon Equation, 53–62, 192 Government securities, 259–260 Graham, Benjamin Depression-era mortgage bonds, 185 Hollerith Corporation, later IBM, 78 on income production, 44 on investor’s chief problem, 165 pre-1929 stock bubble, 57 Security Analysis, 157–158 Graham, John, 87 Grant, James, 224–225 Great company/great stock fallacy, 173–175, 185 Great Depression fear of short-term losses, 172–173 Fisher’s gaffe, 43 Graham on, 157–158 impact of, 5–6 manias, history of, 145–148 societal stability and DR, 64–65 Great Man theory, 95–96 Greenspan, Alan, 246 Gross domestic product (GDP) and technological diffusion, 132–134 Growth stocks (“good” companies) asset allocation, 247, 248–255, 251–253 earnings expectations of, 173–175 Graham on, 158 returns of, 34-38 “Gunning the Fund,” 207-209 Halley, Edmund, 138 Hammurabi, 7 Hard currency (gold), 16-20 Harrison, John, 142–143 Harvey, Campbell, 87 Hassett, Kevin, 53, 264 Hedge funds, 178–179 Herd mentality and overconfidence, 166-176, 181, 182 Hewlett-Packard, 158 High-quality corporate bonds, 260 High Yield bonds, 69–70 “Hindsight bias,” 8 History of investing and returns (Pillar 2), 127–162 about, xi, 296 ancient, 6–9 bonds, 13–22 European, middle ages to present, 9–13 on risk, 11-13, 22-29, 38-39 stocks investing in U.S., 4–6 outside U.S., 29–32 prior to twentieth century, 20 twentieth century, 20–22 summary on risk and return, 38-39 Treasury bills in twentieth century, 20–22, 23 Hollerith Inc., later IBM, 78 House, saving for, 240 Hubbard, Carl M., 231 IAI, 211 Ibbotson, Roger, 225 IBM (International Business Machines), 78, 83, 150, 151 Immediate past as predictive, behavioral economics, 170–171 “Impact cost,” mutual funds, 84, 85, 92, 94, 208, 211 Impatience, societal, and discounted dividend model (DDM), 46 “In-Between Ida,” asset allocation example, 269-271 Income production and discounted dividend model [discounted dividend model (DDM)], 43–73 Index fund advantages of, 95-105 bonds, 257–263, 258–259 defined, 97 exchange-traded funds (ETFs), 216, 217, 254, 255 performance and efficient market hypothesis, 95–98, 102–104 vs. performance of top 10% funds, 81 sectors in portfolio building, 122–124, 250, 251–253 tax efficient, 99 INEPT (investment entertainment pricing theory), 172 Inflation bond performance, 16-20 and gold standard, 16–18 government response to, 19–20 inflation risk, 13 and stocks, 20, 24 Inflation-adjusted returns earnings growth, 60 stocks, bonds and bills, 19, 20–22 young savers, 237–239 Inflation risk, 13 Information speed of transmission, 131 and stock prices, 89–90 Initial public offering (IPO), 134, 172 In Search of Excellence (Peters), 64 Instant gratification and discounted dividend model (DDM), 46 The Intelligent Asset Allocator (Bernstein, W.), vii, 110 Interest-rate risk, 13 Interest rates in ancient world, 6-8 annuity pricing, 10-12, 13 and bond yields, 10, 16-20 bonds and currency, changes from gold to paper (1900-2000), 17–19 as cultural stability barometer, 8–9 European, 8-13 Fisher’s discount rate (DR), 46–47 historic perspective on bills and bonds, 9-15 risk, 13 International Business Machines (IBM), 78, 83, 150, 151 Internet Capital Group, 152 Internet/dot-com as bubble, 151–152, 153, new investment paradigm, 56–58 Invesco mutual funds, 205 Investment vs. purchase, 45 vs. saving, 134, vs. speculation, 44, 157 Investment advisors (See Advisors, investment) Investment and Speculation (Chamberlain), 157 Investment Company Act of 1940, 161, 203, 213, 217 Investment entertainment pricing theory (INEPT), 172 Investment newsletters, 77, 78, 87 Ip, Greg, 167 IPO (initial public offering), 134, 172 iShares, 251-253, 257 Japan dominance in late 1970s, 66–67, 181–182 technical progress and diffusion, 132 Jensen, Michael, 78–80, 214 Johnson, Edward Crosby, II, 83, 91 Johnson, Edward Crosby, III (“Ned”), 194, 207, 208, 210 Jorion, Phillippe, 30 Journal of Finance, 80, 225 Journalist coverage, 219–225 JTS (junk-treasury spread), 70 Junk bonds, 69–70, 150n1, 260, 263, 283, 288-289 Junk-treasury spread (JTS), 70 Kahneman, Daniel, 166 Karr, Alphonse, 162 Kassen, Michael, 207, 219 Kelly, Walt, 179 Kemble, Fanny, 143 Kemper Annuities and Life, 205, 210 Kemper Gateway Incentive Variable Annuity, 205 Kennedy, Joseph P., Sr., 147 Keynes, John Maynard, 41-42, 18, 221 Kindleberger, Charles, 136–137 Kmart, 34–35 Ladies Home Journal, 65 Large company stocks asset allocation, 244–255, and Fidelity Magellan Fund, 92 rebalancing, 289–290 returns, 32-34, 38, 72 Law, John, 137–138 Leinweber, David, 88 Leveraged buyouts, 150n1 Leveraged trusts, 147–148 Lipper, Arthur, 83 Litton, 149–150 Load funds fees, mutual funds, 79, 196, 203–205, 216 Long Term Capital Management, 129, 179 Long-term credit (See Bonds) Long-term returns asset classes, 16-39 bonds, in asset allocation, 113–114 expected, in asset classes, 70, 71 Gordon Equation, 53–62, 192 stocks, 20-39 LTV Inc., 83 Lumpers vs. splitters in asset mix, 247, 248–255, 251–253 Lynch, Peter, 91–93 Mackay, Charles, 151 Malkiel, Burton, 55, 224 Management fees, mutual funds, 206, 209-211 Manhattan Fund, 83–84 Manias, 129–152 about, 129–130 bubbles (See Bubbles) identification, 153 Internet, 151–152, 153 Minsky’s theory of, 136, 140 new technology, impact of, 130–134 1960-1970 (Go-Go years), 148–151 railroads, 143-145, 158, 159–160 Roaring Twenties, 145–148, 153 space race, 149–150 Margin purchases, 147–148 Market bottom, 153–162 about, 153–154 as best time to invest, 66 buying at, 283 “Death of Equities,” 154–157 Graham on Great Depression, 157–161 panic, 161–162 Market capitalization, 33, 123, 245 Market impact, mutual fund costs, 82, 94–95, 208 Market strategists, 87, 169, 176, 186, 219 Market timing, 87–88, 108, 220 Market value formula, 52 McDonald’s, 150, 158 Mean reversion, 170 Mean variance optimizer (MVO), 108 Media, 219–225 Mellon Bank, 96 Mental accounting, 177, 186 Merrill, Charles Edward, 193–194, 213 Merrill Lynch, 88, 193–194, 200 Microsoft, 59, 166, 185 Miller, Merton, 7 “Millionaire,” origin of term, 138 The Millionaire Next Door (Stanley and Danko), 239 Minding Mr.

The Quants
by Scott Patterson
Published 2 Feb 2010

One day, while visiting her office, he made a pit stop at the men’s room. He ran into David DeLucia, a junk bond trader he recognized from a chess club they both played at. DeLucia gave Weinstein a quick tour of Goldman’s trading floor, which the starry-eyed Weinstein parlayed into a series of interviews. He eventually landed a part-time job working on Goldman’s high-yield bond trading desk when he was just nineteen years old. In 1991, he started taking classes at the University of Michigan, majoring in philosophy, drawn to the hard logic of Aristotle and the Scottish skeptic David Hume. He also became interested in blackjack, and in 1993 picked up Ed Thorp’s Beat the Dealer.

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
by Kevin Phillips
Published 31 Mar 2008

Citi’s stock market quotation had collapsed into single digits, and the bank could have failed if examiners had strictly interpreted the definition of a bad loan. They did not. New York Federal Reserve Bank president Gerald Corrigan used his good offices to arrange a billion-dollar investment-cum-bailout by Saudi prince Alwaleed bin Tawal. Episode number three involved the Federal Reserve Board’s early- 1990s bailout of junk (high-yielding) bonds through sharp interest-rate reductions that took the federal funds rate down to twenty-year lows. Some of these bonds were issued to raise money for weaker corporate borrowers, but others funded the leveraged buyouts that became so notorious. Such bonds also lost cachet as Michael Milken of Drexel Burnham, the architect and promoter of the junk bond concept and distribution system, was indicted on ninety-eight counts in 1989, eventually plea-bargained, went to jail, and paid a fine of $600 million.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

Had someone downloaded everything? I had the laptop shipped overnight to Dallas and with trepidation returned to the conference. I got back in time to hear Jeremy Stein’s speech. Widely regarded then as the brightest mind on the Board of Governors, he delivered an alarming prediction based on the behavior of high-yield bond spreads. Bond spreads behave like an accordion. As the price to finance riskier credit increases, spreads widen, meaning investors demand more compensation to take on the risk of default. As economic cycles peak and inevitably turn, the accordion contracts and the compensation investors demand decreases.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

The Rexnord debt—which was still rated as junk debt, meaning the big credit-rating agencies believed the debt was so risky that it was below investment grade—was sliced and split like cord wood and then stacked into a wide variety of funds that were sold to investors. Rexnord debt ended up in Credit Suisse’s offerings with names like the Credit Suisse High Yield Bond Fund, the Credit Suisse Asset Management Income Fund, and the Credit Suisse Floating Rate High Income Fund. All of these funds contained debt from numerous corporations that, like Rexnord, had taken out heavy loads of leveraged loans and issued corporate bonds. The majority of CLOs were owned by big institutional investors like insurance companies, mutual funds, and banks.

Buy Now, Pay Later: The Extraordinary Story of Afterpay
by Jonathan Shapiro and James Eyers
Published 2 Aug 2021

Some old market heads compared it to Fortescue Metals Group, led by a divisive founder, Andrew Forrest, which found an ore deposit under the noses of giants BHP and Rio. Forrest’s pitch was that he could get the ore to port more cheaply, through rail transport that he would construct. The financing came from a maverick New York investment firm, Leucadia, and the US high-yield bond market. Few Australian institutions gave Forrest a chance in 2006; one analyst even pledged to tie himself to the tracks on the day the first train left the ore site, because it wouldn’t happen. But it did happen, and by 2020 Fortescue was a top twenty company, paying out north of $5 billion in dividends to shareholders.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

Credit quality, the probability that a bond issuer will make all bond payments when they are due, greatly concerns bond investors. Investors expect that the issuers of investment grade bonds will make all interest and principal payments on time. The interest and principal payments on junk bonds are less certain. The latter are also called high yield bonds because investors require high yields to compensate for the probability that the issuers will default on their payments. The credit quality of a bond depends on the financial strength of its issuer and upon that collateral and bond covenants that the issuer uses to secure the bond. Treasury bills, Treasury notes, and Treasury bonds are debt securities issued by a country.

…

See immediate-or-cancel orders good orders, 82–83 good-this-month orders, 83, 84 good-this-week orders, 83, 84 good-till-cancel orders, 83, 84 good-until orders, 83, 84 Gosset, W.S., 454 government, 178, 213, 242, 413 government bonds, 46, 59 gravitational effect, 573, 574 Grossman, Israel, 589 Gulf of Mexico, 352 gunning the market, 256, 257 Hammer, Armand, 230 handicapping, 479 hand signaling, 90, 104, 108 hanging over the market, 324, 325 hard dollars, 153 harvesting losses, 193 “Heard on the Street” (column), 587 hedged positions, 182 hedge funds, 349 hedge portfolios, 348, 349–50, 353, 354, 356–57, 362, 373 hedge ratios, 348 hedgers and hedging, 33, 46, 182–89, 193, 205 definition of, 6, 43, 182 with forward contracts, 183–84, 215 with futures contracts, 184–85, 215, 335 hedging by combining businesses, 183 with index futures contracts, 186 markets, 188–89 predicting trades, 253 public benefits of, 214 with stock options contracts, 186–87 with swaps, 187–88 wheat and flour example, 183–85 hedges, 182 hedging vehicles, 182 hidden orders. See undisclosed orders highly correlated estimates, 237 highways, 209 high-yield bonds, 40 hitting the bid, 280 Hoke, Gary Dale, 267 holders of record, 169 holding period return, 446–47 Hong Kong Futures Exchange, 109 Hong Kong Stock Exchange, 52 horse racing, 91, 190, 479 hot order flows, 519 house account, 149 Hutchinson, Benjamin P., 255 hybrid contracts, 43–44 hybrid markets, 96, 532 hypothecated securities, 169 IBM, 28, 325 Iceberg of Transaction Costs, 437 iceberg orders.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
by Steven Drobny
Published 18 Mar 2010

It is as though the rap artist 50 Cent has taken over the advisory board. The fund is going to “get rich or die tryin’.” Harvard Endowment Portfolio (ABD), Fiscal Year 2010 SOURCE: Financial Times. Foreign Equities 11% Domestic Equities 11% Emerging Equities 11% Private Equities 13% Absolute Returns 16% Commodities 14% Real Estate 9% High Yield Bonds 2% Foreign Bonds 2% Domestic Bonds 4% Inflation Indexed Bonds 5% Cash 2% This portfolio will work if the dollar keeps falling or the world has inflation. It is a hopeful portfolio, and it all depends on China. China in fact shares the same risk as the world’s largest pension schemes—that an overleveraged American consumer does not return to their manic buying of old.

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
by Duff McDonald
Published 5 Oct 2009

The investment bank First Boston had roped Control Data into a unique kind of bond offering that stipulated the company would be required to make a tender offer for outstanding bonds if it sold stock in Commercial Credit. Most spin-offs sold about 20 percent of a subsidiary’s stock to the public. But such a portion wouldn’t raise enough money for Control Data to tender for the high-yield bonds. All these problems led to an audacious idea. Perhaps, the deal makers wondered, the combination of Sandy Weill’s reputation and pedigreed Morgan Stanley running the transaction might enable them to spin off 80 percent of the company. It would be a blockbuster, and it proved to be the only feasible option.

Commodity Trading Advisors: Risk, Performance Analysis, and Selection
by Greg N. Gregoriou , Vassilios Karavas , François-Serge Lhabitant and Fabrice Douglas Rouah
Published 23 Sep 2004

The purposes of multi-index models are varied and, in addition to performance attribution, include forming expectations about returns and identifying sources of returns. Sharpe (1992) decomposes stock portfolio returns into several “style” factors (more narrowly defined asset classes such as growth and income stocks, value stocks, high-yield bonds) and shows that the portfolio’s mix accounts for up to 98 percent of portfolio returns. Similarly, Brinson, Singer, and Beebower (1991) show that rather than selectivity or market timing abilities, it is the portfolio mix (allocation to stocks, bonds, and cash) that determines over 90 percent of portfolio returns.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

The securitizing of prime mortgages, which Lewis Ranieri and Salomon Brothers had pioneered back in the 1970s, was already a big business. Wall Street traders were on the lookout for other cash streams to securitize, and subprime mortgages, which are generally regarded as loans issued to borrowers with a FICO rating below 640, offered an attractive opportunity. The high interest rates these loans carried would translate into high-yielding bonds, which would be irresistible to investors. That was the theory, anyway, and when firms such as Prudential Securities, Lehman Brothers, and Bear Stearns tried it out, it worked. The investment banks lent money at a rate of 6 or 7 percent to mortgage companies such as ContiMortgage and Long Beach Mortgage, which passed on the money to subprime borrowers, charging them a substantially higher rate—10 percent, or even more.

Red Notice: A True Story of High Finance, Murder, and One Man's Fight for Justice
by Bill Browder
Published 3 Feb 2015

I felt so out of place that I curled my toes in my shoes as smooth-talking, good-looking Texans slapped each other on the back and shot the shit about baseball, big money, and real estate development (which was Trammell Crow’s business). Then there was the Drexel Burnham Lambert reception where I tried to stay awake as a team of balding bond salesmen with fancy suits droned on about the thrilling world of high-yield bond trading in their Beverly Hills office. I thought, No, no, and no thank you. The more I went to these things, the more out of place I felt, and one interview in particular drove it home for me. It was for a summer-associate job at JP Morgan. I didn’t particularly want to work there, but how could I not interview for a job at JP Morgan, one of the top firms on Wall Street?

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

They were securities of “fallen angels,” companies that once seemed safe and secure but now weren’t, of which there were many in the 1970s. In 1977, though, Drexel began manufacturing junk—underwriting bond issues that had low ratings and high interest rates from the start. With inflation moving into double digits, these “high-yield” bonds attracted investors, which meant that, despite a still-floundering stock market, it was now possible for even small operators to raise big money in the debt market. A new takeover era could begin.33 This time around, hostile takeovers would have articulate and influential defenders. The most strident invariably had ties to the University of Chicago,34 but Manne had made sure it wasn’t just Chicagoans who understood his argument.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

To understand why it really happened, you need to go back to the 1970s, when first-tier companies could routinely meet their financing needs from Wall Street and the banking community, whereas less established companies had to scramble. Seizing an opportunity to finance them, a young financial innovator named Michael Milken built a capital-raising machine for these companies from within a stodgy old Wall Street firm, Drexel Burnham Lambert. Milken’s group underwrote issues of low-rated, high-yielding bonds—the so-called junk bonds—some of which were convertible or came with warrants to purchase stock. The higher yield was the extra compensation investors required to offset the perceived risk that the bonds would default. Filling a gaping need and hungry demand in the business community, Milken’s group became the greatest financing engine in Wall Street history.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

Carry trading is the investment style of buying securities with high “carry,” that is, securities that will have a high return if market conditions stay the same (e.g., if prices do not change). For instance, global macro investors are known to pursue the currency carry trade where they invest in currencies with high interest rates, bond traders often prefer high-yielding bonds, equity investors like stocks with high dividend yields, and commodity traders like commodity futures with positive “roll return.” Low-risk investing is the style of exploiting the high risk-adjusted returns of safe securities. This investment style is done in several different ways across various markets.

Shutdown: How COVID Shook the World's Economy
by Adam Tooze
Published 15 Nov 2021

David, “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox,” American Economic Review 80, no. 2 (1990): 355–61. 2. R. Solow, “We’d Better Watch Out,” New York Times Book Review, July 12, 1987, 36. 3. L. Light, “Good Vaccine News Has Immediate Impact on the Stock Market,” Chief Investment Officer, September 2, 2020. 4. A. Scaggs, “High-Yield Bonds Are Surging While Treasuries Slump on Vaccine News,” Barron’s, November 2, 2020. G. Campbell and J. Turner, “How Has the News of a Vaccine Affected World Stock Markets?,” Economics Observatory, November 13, 2020. 5. M. Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths (PublicAffairs, 2015). 6.

Overwhelmed: Work, Love, and Play When No One Has the Time
by Brigid Schulte
Published 11 Mar 2014

And the intensity, like an exploding supernova of angst, culminates with frustrated college admissions officials fielding e-mails about grades and class schedules and job recruiters asking parents to kindly not write résumés or sit in on interviews.3 Academics say intensive mothering is a white middle-class phenomenon. Middle-class mothers, researchers contend, practice “concerted cultivation” and invest time in their children as if they were high-yield bonds with long-term payout. Working-class mothers parent in a more hands-off “natural growth” way.4 But I wonder. Time studies make the compelling case that everybody’s ratcheted up the time spent with kids. And some of my reporting was finding a more complicated picture. When I met Elizabeth Sprague, thirty-one, a single mother of four in Frederick, Maryland, she was getting by on about $1,700 a month from child support and food stamps and trying to make a few bucks selling ads on the Internet while her children napped.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

The coronavirus pandemic had made investors take a warier look at the massive debt pile sitting on corporate balance sheets. Even for the companies with the highest ratings and the lowest chance of default, spreads—the premium corporations were paying to borrow relative to rates on government bonds—had roughly doubled since the start of March. The riskier high-yield bond market hadn’t been open to companies looking to raise cash since March 4, as their spreads rocketed to the highest level in nine years. The momentary relief in parts of the corporate debt market had been enabled by the Fed’s Sunday afternoon rate cut and bond-buying announcement, paired with its Monday afternoon pledge to shore up commercial paper.

The Last Tycoons: The Secret History of Lazard Frères & Co.
by William D. Cohan
Published 25 Dec 2015

"The best way to get business is over the transom" is how the onetime partner Bob Lovejoy put it, much to Loomis's ongoing consternation. Unlike the other, far better capitalized Wall Street firms, Lazard had few ways, other than sound advice, to get its hooks into new clients. The firm didn't make corporate loans and rarely underwrote corporate bonds, high-yield bonds, or corporate equity. Once the leader in principal investing--the buying and selling of companies for its own account--Lazard had long ago abandoned the business, leaving behind the possibility of healthy profits and a steady stream of captive clients. The article revealed that while there would be no changes to the basic business model, created by Andre, of offering blue-chip clients world-class advice, Michel was now prepared to make tweaks on the margins.

…

One day early on, Felix, Michel, and Damon Mezzacappa decided that Steve had gotten control of too many of the firm's limited resources, and in any event they didn't really want to pursue the business that Steve described. Felix had always been an outspoken critic of Mike Milken and the use of high-yield bonds to finance takeovers, so for Steve publicly to commit the firm to that line of business, while innocent enough, rankled him. Quietly but definitively, Steve's "special situations" group was dissolved even before it began. Steve felt the firm had snookered him but quietly accepted his fate. "In two days the whole thing was gone, and I became just another partner doing my business," he said.

Wealth and Poverty: A New Edition for the Twenty-First Century
by George Gilder
Published 30 Apr 1981

Wealth all too often comes from doing what other people consider insufferably boring or unendurably hard. The treacherous intricacies of building codes or garbage routes or software languages or groceries, the mechanics of butchering sheep and pigs or frying and freezing potatoes, the mazes of high-yield bonds and low collateral companies, the murky lore of petroleum leases or housing deeds or Far Eastern electronics supplies, the ways and means of pushing pizzas or insurance policies or hawking hosiery or pet supplies, the multiple scientific disciplines entailed by fracking for natural gas or contriving the ultimate search engine, the grind of grubbing for pennies in fast-food unit sales, the chemistry of soap or candy or the silicon-silicon dioxide interface, the endless round of motivating workers and blandishing union bosses and federal inspectors and the IRS and EPA and SEC and FDA—all are considered tedious and trivial by the established powers.

All the Money in the World
by Peter W. Bernstein
Published 17 Dec 2008

According to financial policy.org, 18 to 22 percent of the trading volume on the New York Stock Exchange and 30 to 35 percent on the London Stock Exchange is by hedge funds. Seventy-five percent of actively traded convertible bonds are held by hedge funds. Hedge funds account for 45 percent of trading volume in emerging market bonds, 47 percent in distressed debt, and 25 percent in high-yield bonds. Plus, they account for over half the trading volume in credit derivatives—an exploding market, thanks to their involvement. 5. In early 2007, for example: Jenny Anderson, “SEC Is Looking at Stock Trading,” New York Times, Feb. 6, 2007. 6. “Only the final conflagration”: Edmund C. Stedman, ed., New York Stock Exchange (1905; reprint, New York: Greenwich Press, 1969), p. 100. 7.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

In 1988, KKR won the bid for the largest leveraged buyout in investment history to that point—that of RJR Nabisco for $25 billion, a storied investment transaction famously chronicled in the book Barbarians at the Gate and the film of the same name.40 These firms of the 1980s were the first in the private equity world to use modern techniques of leverage, high-yield bonds, dividend recapitalizations, and new capital structures that have become so prevalent in the private equity world today. The inventiveness of the partners of the first movers in this industry allowed them to reach new levels of success and rewards. However, while the significant use of borrowing is a vital component of the high return historically achieved by many private equity funds, it can also lead to serious shortfalls in outcomes when operations or the economic environment fail to unfold as expected.

The Case Against Education: Why the Education System Is a Waste of Time and Money
by Bryan Caplan
Published 16 Jan 2018

Using these completion probabilities, Figure 5.7 shows Degree Returns by ability. Figure 5.6: Degree Completion Probability by Student Ability Source: See Technical Appendix. Results closely match common sense. High school is lucrative for all four archetypes. Even Poor Students can reasonably expect the resources they invest in high school to out-perform high-yield bonds.72 College, in contrast, is a solid deal only for Excellent and Good Students. Largely owing to their high failure rate, Fair Students who start college should foresee a low 2.3% return on their investment. For Poor Students, it’s a paltry 1%. Master’s degrees, finally, are a so-so deal for Excellent Students, a bad deal for Good Students, and a money pit for Fair and Poor Students.

Capitalism in America: A History
by Adrian Wooldridge and Alan Greenspan
Published 15 Oct 2018

In 1976, three young bankers with Bear Stearns, Henry Kravis, Jerome Kohlberg, and George Roberts, came up with the idea of a new kind of organization, a partnership that created a succession of investment funds, took positions in companies, and then sold them off after a fixed period of time. KKR thrived because it combined two rare skills: the ability to put together deals and the ability to manage the companies that they took over by making managers think and act like owners. Drexel Burnham pioneered the use of high-yield bonds to take over companies. In the late 1970s, Michael Milken, based in Beverly Hills rather than on Wall Street, invented a new type of bond specifically designed for this “noninvestment grade” market that allowed companies that were too small or risky to issue regular bonds to get access to the bond market.

Alpha Trader
by Brent Donnelly
Published 11 May 2021

The first price that trades after news comes out is also a significant reference point going forward. Figure 10.1 is an example of a NewsPivot and price gap: Chart courtesy of Refinitiv In the chart of HYG (Figure 10.1, the high-yield corporate bond ETF), you can see that on the day the Fed announced their intention to buy high-yield bonds, HYG gapped massively higher. It closed just below $78 the day before then opened at $82 the day of the announcement. Therefore, the NewsPivot (price before the news) is $78 and the other side of the gap is $82. These are both significant reference points going forward. In the weeks that followed, HYG closed the gap and retested the NewsPivot.

Money Changes Everything: How Finance Made Civilization Possible
by William N. Goetzmann
Published 11 Apr 2016

It is not like the holder of a mortgage-backed security must simply rely on the earnest promises of a homeowner. If the homeowner fails to pay, you can foreclose. What, then, could go wrong? Abraham Van Ketwich and a number of other Dutch bankers also negotiated the structure to securitize the early debt of the United States. They bought the high-yielding bonds of the young nation in hopes that the Revolution would succeed. Dutch investors made out well when the debt of the United States was reorganized by Alexander Hamilton and the young nation made good on its financial commitments. LAND BANKS The securitization of land grew out of the financial imagination of the eighteenth century.

The Simple Living Guide
by Janet Luhrs
Published 1 Apr 2014

Safety Level Low return Investment Passbook savings Certificates of Deposit (CD) Money market funds U.S. Treasury securities Government savings bonds Whom to consult Bank Bank or broker Broker Broker Bank or broker Moderate Risk Moderate Return High-quality bonds Blue-chip stocks or mutual funds (investing in above) Broker Broker Increasing Risk Low-quality/high-yield bonds Speculative stock or mutual funds (investing in above) Broker Broker Highest Risk Options Commodities Only for the very sophisticated One option is to diversify your investments. This way you spread the risk around. You could put a little in a higher-risk stock and a little more in a variety of secure investments.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite
by Daniel Markovits
Published 14 Sep 2019

Now, after a quarter century (or three centuries) of lying fallow as merely theoretical possibilities, these advances encountered a financial workforce capable of deploying them and a broader society that needed the services they made possible. Practical innovation followed almost at once, with forty fundamentally new financial products and practices introduced between just 1970 and 1982. The innovators became rich. In the early 1980s, for example, super-skilled workers at Drexel Burnham Lambert pioneered the high-yield bond market: “There wasn’t another firm in the world that knew how to price a junk bond,” a Drexel insider remembers, which made the junk bond business immensely profitable. The profits of course drew competition from other newly minted super-skilled workers, and this competition generated new innovation, including in the mortgage-backed securities that proved so profitable in the early 2000s and in the high-frequency trading platforms that are so profitable today.

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by Duff McDonald
Published 24 Apr 2017

Hutton & Company in the 1960s, Shad had to face up to the problems inherent in being late to the game. He wisely decided not to target America’s largest companies, and focused instead on its smaller, underserved ones. But it was how he decided to serve those companies that made him a legend: Shad was one of the pioneers in the development of the high-yield bond market. In doing so, he helped unleash the entrepreneurial energies of companies such as Ted Turner’s media empire. He also helped provide the fuel for the leveraged buyout boom, which, on its good days, helped bring about an essential reordering of the American economy. In 1981, as a reward for serving as his campaign finance head in New York, Ronald Reagan appointed Shad as chairman of the Securities and Exchange Commission, making him the first Wall Street executive to hold the post in fifty years.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

But in the interbank bilateral repo market where private label ABS was used as collateral, funding terms were getting stiffer and stiffer.16 Haircuts on Repo Agreements (%) Securities April ’07 August ’08 US Treasurys 0.25 3 Investment-grade bonds 0–3 8–12 High-yield bonds 10–15 25–40 Equities 15 20 Senior-leveraged loans 10–12 15–20 Mezzanine-leveraged loans 18–25 35+ Prime MBS 2–4 10–20 ABS 3–5 50–60 Source: Tobias Adrian and Hyun Song Shin, “The Shadow Banking System: Implications for Financial Regulation,” Federal Reserve Bank of New York Staff Reports 382, July 2009, table 9.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
by Ron Chernow
Published 1 Jan 1990

“It was the culture to let the client call you.”30 Now Morgan Stanley would increasingly serve as an engine of the takeover boom. As its underwriting business declined, Morgan Stanley turned to businesses it once would have rejected haughtily, entering the netherworld of junk bonds. These high-risk high-yield bonds were often issued to support takeovers by companies of questionable solidity. The new junk bond department coincided with Morgan Stanley’s sudden interest in small start-up companies. As Bob Greenhill explained, “Morgan was building a high-technology effort at that time, and I said, ‘How can we not be in a business that is so necessary for so many of our growing clients?’

Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris
by Richard Kluger
Published 1 Jan 1996

Bible’s confidence that Philip Morris would derive far more mileage from its core tobacco business was justified by the relative weakness of its chief U.S. rivals. The prime achievement of runner-up RJR Nabisco was that it had managed in six years since the LBO to retire about 60 percent of its $25 billion debt by aggressive conversion of its high-yielding bonds. And KKR, the New York takeover artists who had nearly choked on the RJR buyout, had maneuvered themselves out of the picture by selling off or transferring most of its equity interest. On the operational side, though, only RJR’s Nabisco food business sparkled, proportionately outearning PM’s far more complex food operations.