how to buy junk bonds

Stocks, bonds, mutual funds — there’s a whole raft of different securities to sink your money into, and perhaps the most dubiously named of them all is the junk bond.
Ever wonder how large companies raise capital when the bank won’t loan them any more money? One of the most accepted ways of borrowing money in the financial world is to issue bonds.
Junk bonds are bonds issued by companies with low credit ratings, as opposed to the investment-grade bonds offered by corporations with better credit and longer track records.
Many big money managers say they remain bullish on these risky corporate bonds despite concerns that the market is overheated and worries that geopolitical unrest could fuel a rush to safer assets.
Large institutions are snapping up U.S. junk bonds, taking advantage of a price slide triggered by an exodus of individual investors.
As long as oil demand remains strong — and with improving economic and employment numbers starting to come out, that is looking pretty likely — Energy XXI should easily continue to generate enough profits to pay its debts until December 2017, when its single-B rated bonds mature.  As with Pilgrim’s Pride, the choice to invest in Energy XXI’s bonds over those of tech darling Apple comes down to two fundamental points about real investment risk.
Sales and cash flow are currently growing at a healthy 6 to 7 percent rate, so there’s more than enough of the latter to allow Apple to cover the $600 million in debt service it will face on its bonds and other borrowings in the coming 12 months.
For instance, in 1994, when the ten-year Treasury moved up two full percentage points, investment-grade bonds lost an average of 3.3% (the loss is due to a decline in the bonds’ market price); but high-yield bonds delivered a total return of 7.3%. One big reason is that a stronger economy, which often leads to higher interest rates, makes it easier for junk-rated companies to repay their debts.
U.S. Treasury bonds maturing in ten years yield 2.0%. A bond issued by Goldman Sachs and maturing in February 2016 pays a mere 3.3%. A five-year savings certificate at the average New York City bank yields a paltry 1.1%. You might as well put your money under the mattress.
Junk bonds can be dangerous, which is why Sabur Moini, manager of Payden High Income Fund (PYHRX) since 2000, prefers “sleep-at-night high yield.” He looks for “high-quality, high-performing companies” with “stability and predictability of cash flow.” These have a lot of debt but generate enough earnings to pay it back.
For many investors, the term "junk bond" evokes thoughts of investment scams and high-flying financiers of the 1980s, such as Ivan Boesky and Michael Milken, who were known as "junk-bond kings." But don’t let the term fool you – if you own a bond fund, these worthless-sounding investments may have already found their way into your portfolio.
Not only do these funds allow you to take advantage of professionals who spend their entire day researching junk bonds, but these funds also lower your risk by diversifying your investments across different asset types.
Although junk bonds pay high yields, they also carry higher-than-average risk that the company will default on the bond.
Any individual investor can determine this by looking at the yield spread between junk bonds and U.S. Treasuries.
Junk bonds are an IOU from a corporation or organization that states the amount it will pay you back (principal), the date it will pay you back (maturity date) and the interest (coupon) it will pay you on the borrowed money.
Historically, average yields on junk bonds have been 4-6% above those for comparable U.S. Treasuries.
Secondly, investing in junk bonds requires a high degree of analytical skills, particularly knowledge of specialized credit.
Despite their name, junk bonds can be valuable investments for informed investors.
If you notice the yield spread shrinking below 4%, then it probably isn’t the best time to invest in junk bonds.
Many junk bond funds do not allow investors to cash out for one to two years.
The final warning is that junk bonds are not much different than equities in that they follow boom and bust cycles.
The bond market is chiefly set up for institutional investors who trade $1 million or more in face amount of bonds at a time and retail investors have largely been left to do as best they can.
The relative lack of liquidity in the bond market and the fact that it is oriented for institutional investors rather than retail investors means that you really want to know where a bond has been trading before agreeing to buy or sell at a given price (be careful not to get ripped off).
On the other end of the scale, Schwab will only let you search investment grade bonds online (you must call the bond desk to trade junk), will only let you buy online (you must call to sell), and does not allow limit orders at all.
While there has been a revolution in online trading of stocks by retail investors in the last 20 years or so, the bond market has been slower to replicate the ease, low costs and lack of hassle stock investors enjoy.
So would-be retail bond investors must exercise more care than is necessary with equity trading in order to avoid getting ripped off.
It is a fact of life that institutional investors get vastly better trade price execution than retail bond investors, and they do so at a lower transaction cost.
For example, Overseas Shipholding Group (equity ticker OSG) is a deeply junk rated oil tanker company that has seen its bonds drop from trading around par (par means 100 cents on the dollar when comparing the market price to the face amount of the bonds) to distressed levels between 60 and 70 cents on the dollar.
At Nomura Corporate Research and Asset Management, his junk bond funds substantially outperformed both high yield and S&P indices for more than 18 years—and in this book he explains the method he used to achieve such remarkable results.
"Looking for companies whose creditworthiness is stronger than their bond rating." Agreed this is very similar to Graham’s systematic search for stocks that were worth more than they cost, but given Levine’s focus on the growth of high quality companies (for junk bonds that is) I would rather compare his focus area to those of Philip Fisher or Warren Buffett.
In How to Make Money with Junk Bonds, a pioneer of the junk bond business gives you the insight and information you need to lay that fear to rest—so that you can generate unprecedented profits in this $1 trillion market.
On the one hand this is an often sweeping basic introduction to the topic of junk bonds leaving the reader wanting more details on how to perform the business and financial credit analysis, but on the other hand it presents a framework for managing high yield bonds that is both intuitive and that has a proven success.
My interpretation is that Levine had an ability to not let greed overshadow stringent analysis and hence he avoided credit losses in bad times ("Just say no!"), but even more importantly he performed an analysis of companies’ businesses that was more forward looking than most other junk bond investors.
What Levine calls his strong horse method is a two-step process where a credit analysis is first performed and then the results are related to the rating and yield of the bond in question.
Junk is something useless, right? Something you want to toss in the trash? Well, "junk" bonds are definitely not useless.
Marketplace Money Senior Producer Paddy Hirsch explains what a junk bond really is.
Rating is available when the video has been rented.
Rick’s professional background includes 12 years as a market maker on the floor of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.
Holding "free" puts is a great place to be in these all-too-interesting times – especially on the junk-bond market, and most especially if you believe as I do that sooner or later, investors will be reminded of why junk bonds came to be called "junk" in the first place.
In retrospect, the only way an option trader could have made money on price movement this boring is to have sold straddles (i.e., puts and calls in combination) against JNK, and to have presciently refrained from doing so during the killer declines of May 2010 and August-September 2011.
That would give us the January 35/October 0.35 put spread for a net debit of 0.15. Come October 18, when the puts we are short are due to expire, we would cover them (i.e., buy them back) while selling November 35 puts.
To illustrate, with JNK currently trading for around 40, we can "anchor" our spread by buying January 35 puts for around 0.20. Yes, JNK would have to fall sharply to make that a winning bet — about 13% between now and January 17, when the puts expire.
Learn options trading strategies from former market maker Rick Ackerman, who was once labeled by Barron’s as an "intrepid trader" in a headline that alluded to his key role in solving a notorious pill-tampering case.
You may be wondering at this point how we’re going to make money buying puts if the puts already "know," as I’ve implied they do, that the bull market in junk bonds is fated to end badly.
Under ideal circumstances, with JNK falling slowly toward 35 over the next four months, we could conceivably be holding the January puts for a net credit at the time they expire or even before then.
offered Thursday to buy back $158.6 million of high-yield junk bonds at prices sharply discounted from face value as the publishing company struggles to meet debt interest payments.
The offer is for as much as 80% of $125 million in 13% reset notes issued by Community Newspapers Inc., also a unit of Ingersoll Publications Inc.
Ingersoll Newspapers also is offering to buy as much as 51% of its $114.9 million of 14.75% discount debentures for 25% of the principal amount.
Ingersoll Newspapers is a holding company controlled by publisher Ralph Ingersoll.
Large investors are rushing into the riskiest corporate bonds, frustrated by low interest rates on safer investments and convinced that even companies with shaky finances are in little danger of default.
A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield.
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The fund has outperformed 90 percent of its peers in the past three years, a period during which yields on junk bonds globally reached a record-low 5.94 percent last year, according to data compiled by Bloomberg.
The global market for speculative-grade debt, rated below Baa3 by Moody’s Investors Service and BBB- at Standard & Poor’s, is poised to surpass $2 trillion in a matter of weeks, according to the Bank of America Merrill Lynch Global High Yield Index.
DoubleLine cut its allocation to speculative-grade debt in its $1.8 billion Core Fixed Income Fund to 3 percent at the end of last month, compared with the firm’s expected average of 10 percent, said Gundlach, who last April predicted “junk bonds will do OK” for the next four years.
That’s helped push the amount of junk bonds worldwide to $1.97 trillion from less than $1 trillion in March 2009, Bank of America Merrill Lynch index data show.
Junk bonds, which have returned 148 percent since the end of 2008, are showing signs of froth as five years of easy-money policies by central banks caused investors to pour unprecedented amounts of money into the high-yield market.
Jeffrey Gundlach is right on target when he says “They’ve squeezed all the toothpaste out of the tube.” Said spread has now dropped below 400 basis points (4.0 percentage points) to 397 basis points, according to the latest reading on a benchmark Bank of America Merrill Lynch high-yield index.
With borrowing costs for the least-creditworthy companies approaching a record low, junk bonds no longer provide enough of a buffer from rising Treasury yields as the Fed scales back its bond buying, said Gundlach, whose firm oversees $49 billion.
According to Merrill Lynch worldwide junk bond market surged from $1 Trillion to $2 Trillion in under 5 years.
Market to approximate Visa’s earnings per share growth than deal with a junk bond situation where a rate increase could easily cause a few years of income to disappear.
But another way, if interest rates sharply increased by three percentage points, then high-yield bonds could decline by up to 15%, meaning it would take three years of collecting income from your fund just to break even in June 2017.
Right now, the junk bond yield of something like the Bank of America Merrill Lynch Index is at 5.002%. For a quick refresher on the topic: last year, the yields of junk bond indices fell below 5% for the first time in American history, and we are flirting with that mark again this year.
My guess is that a lot of investors are saying, “A diversified basket of so-so securities yielding 5%, I’ll take it.” But you don’t want to put yourself in the position where you are buying something at such a lofty valuation that it has only been seen once before (and that was the previous year, which is still a part of this same business cycle).
You’d be relying on the minimal expenses, reinvest and payout monthly, and the fact that the dollar-cost-averaging in future years would diminish the negative effects of investing into the fund in 2014 to offset the nearly bubblicious valuations in the sector as a whole.
This isn’t like dividend growth investing where you have companies raising their payouts every year to offset inflation; the bonds in the portfolio of an index generally make fixed payments.
Buying junk bonds today at a 5% is not incorporating Benjamin Graham’s margin of safety; in short, you’re betting on things staying roughly as they are today over the next few years so that you can get a total 5% return.
Usually, each percentage point increase in interest rates causes the price of a high-yield bond fund to fall four to five percentage points.
An investor earns money by buying a deep discount bond at a price below the redumption price (if it is an initial purchase) or market rate (if it is a market purchase) and hol…ds the same till maturity or till a time where the discount gets reduced and getxs converted to profit.
"Junk" bonds pay a higher interest rate than high-quality bonds, in order to compensate for the risk of default.
Answer Firsly investors buy junk bond because they are cheaper.Although they have higher risk of default they also have higher return.
Generally, with shipping included you will either pay more purchasing online than through your coin dealer, or you will find limited quantities of junk silver at a decent price.
There are a lot many sites that provide few fundamental details of stocks but only a few of them provide you right buy sell decisions based on their fundamentals and how that company has been performing for past few years.
Also, the assessment of risk for bonds is easier than for stocks due to the availability of grades (e.g., AAA) by rating agencies such as Moody and S&P.
It also yields higher interest rates per year than other instruments such as T…-bills or stocks.
As junk bonds rally, outperforming the rest of the bond market for a second year, fund managers are in a squeeze: the credit quality of new junk bonds is declining, and so are yields.
Bonds rated “B” or lower by both S&P and Moody’s make up 65 percent of the new issue market, compared to 57 percent a year ago, according to Credit Suisse First Boston.
“My mutual fund really wants me to buy bonds with coupons of more than 10 percent, and they just aren’t coming to market in the combination of yield and quality that I’m looking for,” said Gary Goodenough, who runs the $75 billion New England High-Income Fund.
There’s nothing that’s worth the risk,” said Kornitzer, who’s putting new cash from investors into the money market and Treasury bonds, which together average about a 6 percent yield.
Junk bonds are so overvalued in the view of John Kornitzer, who manages the $170 million Buffalo High-Yield Fund, that he hasn’t bought a new issue in a month.
For now, few money managers see signs of an economic slowdown that that might cause companies to default on their junk bonds, so-named because they are rated below investment grade, or below “BBB-” by Standard & Poor’s Corp.
After Sandy, a Red Hook farm awaits a soil test that will reveal its fate.
Junk Bonds In the course of business history, good companies have sometime experienced troubles that caused their debt ratings to be slashed.
They differ from junk bonds in that they were issued as investment grade and fell from grace.
Still, you can’t help casting a lustful glance at that special category of corporate bonds known as  junk bonds with their 10-12% coupons.
So-called investment grade bonds have a rating of BBB or higher.
Junk bonds were tremendously popular in the generation of leveraged buyouts and corporate liquidations (otherwise known as the 1980’s).
Purchasing fallen angels, if done intelligently, is far less speculative than acquiring junk bonds with the hope of holding them until maturity.
By assigning such a rating, the agency is saying that it believes, based on the company’s current financial position, interest coverage ratio, and economic outlook, that the chance is default is not substantial.
The companies that issue these "junk" bonds must somehow entice investors to risk their money.

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