“Even if you haven’t encountered great success yet, there is no reason you can’t bluff a little and act like you have. Confidence is a magnet in the best sense of the word. It will draw people to you and make your daily life. . and theirs. . a lot more pleasant. ” -Donald Trump
Junk bonds are just like a traditional bonds. They are basically a promise from a corporation that states what your initial investment was, the date they will pay you back, and the interest rate which will be applied on the borrowed money. When the bond matures you will receive back your principle as well as the interest payment.
Junk bonds are different from other bonds in terms of the quality of credit. All bonds are placed into categories based on the credit rating of the corporations issuing the bonds. Credit quality is similar to a score card of how well the company is doing. It is similar to an individual's credit score.
There are two basic categories. The first is called “investment grade” This type of bond offers a low risk to investors. Low risk means that they do not offer high returns. However, it also means that the likelihood of the corporation not paying interest is less. If a corporation defaults, or goes out of business the investor can lose both his principle investment as well as any interest payments that are due to him. The other category is “junk bonds”.
These are high yield investments which are high risk. Corporations selling junks bonds have lower credit quality. Due to the risk involved in purchasing junk bonds it has a high rate of return and can be quite profitable for the educated investor. Most junk bonds offer a rate of return of at least 6%. Junk bonds come in two forms, rising and falling. Rising junk bonds are associated with companies that have raised their credit quality and is moving toward being “investment grade”. Falling junk bonds belong to companies which are continuing to have problems with their credit quality.
While junk bonds can be financially rewarding they can reach a point where the benefits do not balance the risk the investor is taking. To determine if the risk is too high you need to consult the “yield spread”. This is an analysis of the difference between the specific junk bond and the U. S. Treasury bonds.
A normal interest rate on a solid junk bond is going to be 6% however, anything below 4% is going to be a good indicator that you should not purchase junk bonds from that corporation. Junk bonds are a great way to take advantage of a corporation's hard financial times.
Deciding on which junk bonds are for you can be a long process but it is important to take the time do the research and ask for advice. Quick money in the stock market is an illusion, it is only through hard work and dedication that investors become successful.
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