On the understanding of high-coupon bonds

Not long ago, China Construction Bank chairman Guo Shuqing should make the introduction of "junk bonds" (junk bond), for small and medium private enterprises to provide new financing channels, China's bond market has developed rapidly in 2009, total corporate bond issuance rose nearly 87% , up to 1.575 trillion yuan, but the corporate bond is not the main way of corporate finance, corporate finance only 13%, 80% of the financing comes from bank loans. Guo pointed out that banks are reluctant to set up new businesses or small and medium private enterprises to provide loans, lack of financing sources of these private enterprises, so the development of "junk bonds" to meet the financing needs of these enterprises, he said, "This may be a bit radical." Because junk bonds are not nice to say, he said, "to use a more appropriate name, such as the innovative high-yield bonds or bond."
In fact, the name of the bond is not so important, "junk" worth mentioning "innovation" or develop a new financial product assets, it is important to understand where it comes from supply and demand, its profits and risk trade-off the new set up or small and medium private enterprises need financing, this is the demand side, but who is willing to offer such financing, that is who is going to invest in such assets? pension funds, mutual funds, retail investors still prefer to gambling? high-interest bonds, As the name suggests, the natural interest than government bonds and large capitalized companies debt is higher, but the risk is much greater, and the complex structure, so the investor must have sufficient reason and experience, investors should also be complicated by the terms of the arrangements to protect the principal's compensation rate. In addition, a reasonable credit rating, sufficient market liquidity, as well as a viable market-oriented bankruptcy law, are essential links, so a successful high-income market does not just from a good name so simple, but requires a variety of factors contributed to this article from the "junk bond" both the basic idea about.


What is a "junk bond"

U.S. high-income market has been large-scale, more than $ 1 trillion. And junk bonds has long been accepted vindication, not called "junk", and now the "name" is a high-interest bonds.

In some occasions, party, people often ask me what to do if the answer high-interest debt, people always look puzzled. Added junk bonds, the other soon become clear. Shows that people in the 1980s when the rise of such assets remember the succession of scandals, junk bonds in people's minds in the short-lived fad is hard to Uncap.

The original so-called junk bonds, refers to the following Standard & Poor's credit ratings B13 bonds issued by companies the United States although several major rating companies to evaluate the use of different letters issuer's credit rating, but the meaning is very close, reflecting the bond's repayment ability, the likelihood of default (probability 0fdefault), there is compensation for breach of contract after the principal rate (fecovefyrate).

Corporate bond rating can be divided into two basic categories: investment grade (1ilVeShlient grade) and non-investment grade (noninvestmdentt grade). BBB investment grade rating in more than reputation is relatively stable, basically have the ability to pay, a little risk.

BB bonds are generally below the level considered to have speculative elements, the risk is relatively high, the ability to pay of instability, also known as speculative bonds (speculative grade), and even dubbed junk bonds and such bonds, high interest rates needed to attract investors, This is the "high interest" the origin of the name of this paper in table summarizes the Moody's and Standard & Poor's rating category.


High Yield bond is lending money to risk buying corporate bonds, debt holders who receive regular interest, maturity, holders of debt to recover the principal person in this point, high-interest bonds and other bonds is no different, so it also face the risk of bond investments generally, such as interest rate risk, inflation risk, reinvestment risk.

In a mature bond market, bonds are like stocks in the free trade before the expiration of the price determined by the market, with the federal funds rate, issuer's financial condition, credit rating of bonds fluctuates, of course, high interest rate risk than bonds, investment grade bonds, the price fluctuations will become more intense.

High Yield Bond investors face the greatest risk is credit risk, the company once the issuer defaults, investors not only get the interest, or even loss of principal. Even if the issuer company is not bankrupt, if it's poor financial situation, it will lead to a decline in credit ratings, while many institutional investors to vote on the bond rating, there are strict regulations, if the ratings fall, they had to sell out the bonds, causing prices to fall, bringing investment losses. In addition, most investment institutions to U.S. market price to calculate market value of the investment report (mark to market), bonds the company's performance directly affects the bond market price fluctuations, even if the investor does not sell bonds, bonds fall, but also affect the performance of institutional investors.

Thus, despite the high interest rate bonds offer high yields, but because the risk is high, many U.S. insurance companies and pension funds are not allowed to invest the bond credit rating is too low, so high-interest bonds and investment grade bond investor base is different.

In the past 10 years, the performance of high-interest bonds, the ups and downs, according to Morgan U.S. High Yield Bond Index (JPM DomesticHY Index), 2000-year return is -6.04% in 2003 in return far more than when the market rose, up to 26.8%. When financial crisis swept Europe, with high interest bonds and the stock market fell, lost 26.55%, but in 2009, actually took a dramatic turn, with high-interest bonds and the stock market rebound, the return rate of 58.18%, setting a record high because of high interest rates the risk of bonds and stock close to its with stock market returns are more relevant .2000 stock markets lower, the S & P Index (S & P 500) lost 9.1%, high-interest return on bonds is -6.04%, but government bonds return is 15.11%, Morgan investment-grade bond index to 9.86%. Links to free download http://www.hi138.com
According to Morgan and Statistics, over the past 25-year bond rate of 5.36% per month average corporate bond defaults. Century, when the Internet bubble burst, the high amount of high interest debt default in 2001, as much as $ 56 billion debt default. financial crisis before the crazy leveraged buyout, has brought the proliferation of high-interest bonds, and investors in their pursuit of high-interest, ignoring the credit quality, even if true "junk", has also been looted. high interest bond yields Therefore, the level of national debt, almost fell, Wall Street's short-jokes, and finally trigger a new round of credit crisis.

bond market was never led, which of course is the worst loss of high-interest debt .2009 In January, the company's breach of contract breach of contract volume of up to $ 48.3 billion, almost more than the previous year's level throughout the year In 2009 total debt default 940 billion, another record high interest rates long-term bonds, the average compensation rate of only 39.2%, that in 2009 nearly one hundred billion U.S. dollars invested in this breach of contract bonds to investors only get back less than 40% of the principal course long-term rate of compensation is just an average, poor choice, all the principal may have take into it. It would appear that, although high interest rates attractive, the risk is also scary. In addition to luck and timing, investors must be proficient in credit analysis, not everyone can bet on a U.S. high-income market has matured, gained some experience, but also a lot of lessons. These experiences and lessons learned are worth thinking about and learn. Links to free download http://www.hi138.com