If an entity is at a heightened risk of defaulting, who is lining up to buy those junk bonds? What’s the benefit? From vantage point, purchasing junk bonds holds much more downside risk than there are upside. So, what’s the point of purchasing these bonds?
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Keep in mind that you are buying the bonds with the credit event already factored into the price (lowered price). The key is to negotiate a low price to such an extent that negotiating the credit event becomes feasible.
If you have enough when the credit even occurs, you become the one to negotiate the terms of repayment and/or take over and practically squeeze most other debt/all equity into tiny portions. If they survive you end up making a lot of money.
Keep in mind that you are buying the bonds with the credit event already factored into the price (lowered price). The key is to negotiate a low price to such an extent that negotiating the credit event becomes feasible.
If you have enough when the credit even occurs, you become the one to negotiate the terms of repayment and/or take over and practically squeeze most other debt/all equity into tiny portions. If they survive you end up making a lot of money.
Like when you buy anything, its the market and risk/reward. An old car with 300k miles may blow up the second you buy and drive it away. But it might not. If you drop the price low enough someone will take the chance. In the case of junk bonds, the borrower may default but they might not not. So if you drop the price of the bond enough it will result in a yield high enough that someone will be willing to take the chance.
Like when you buy anything, its the market and risk/reward. An old car with 300k miles may blow up the second you buy and drive it away. But it might not. If you drop the price low enough someone will take the chance. In the case of junk bonds, the borrower may default but they might not not. So if you drop the price of the bond enough it will result in a yield high enough that someone will be willing to take the chance.
Also Wall Street has a way of memory holing investment vehicles that blew up. Junk bonds are high yield. Never hear the term Leveraged buy out bc it got a bad name in the late eighties (?). private equity has a nicer ring doesn’t it?
Also Wall Street has a way of memory holing investment vehicles that blew up. Junk bonds are high yield. Never hear the term Leveraged buy out bc it got a bad name in the late eighties (?). private equity has a nicer ring doesn’t it?
Much of the work of finance involves pricing and managing risk. The idea behind it is that (within reason) there is a return that is worth the risk.
For example, you might purchase a bond that has a 1 in a million chance of paying you back, but if it does, the bond pays back $10 million for every $1 offered. Given enough opportunities, this might be worth some speculation.
As long as one can spread out their “bets” and make enough of them with at least some reasonable expectation that some will pay off, then it becomes profitable. Now this is high risk, high volatility “investing” but it makes sense for some people.
Junk bonds have higher interest rates so you get more money back when they mature. That higher rate is tied with higher risk – so people who tactically buy them do a lot of analysis on that risk to make the most sound investments they can.
Junk bonds have higher interest rates so you get more money back when they mature. That higher rate is tied with higher risk – so people who tactically buy them do a lot of analysis on that risk to make the most sound investments they can.
Much of the work of finance involves pricing and managing risk. The idea behind it is that (within reason) there is a return that is worth the risk.
For example, you might purchase a bond that has a 1 in a million chance of paying you back, but if it does, the bond pays back $10 million for every $1 offered. Given enough opportunities, this might be worth some speculation.
As long as one can spread out their “bets” and make enough of them with at least some reasonable expectation that some will pay off, then it becomes profitable. Now this is high risk, high volatility “investing” but it makes sense for some people.
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