Am Best Company Rating Scale - The term "junk bonds" may conjure up memories of the 1980s investment scams perpetrated by junk bond kings Ivan Boesky and Michael Milken. But if you own a bond fund today, you probably have some of this crap. already arrived in your wallet. And that's certainly not a bad thing.
Like any bond, a junk bond is a debt investment. A company or government collects money by issuing promissory notes that show the amount you borrow (principal), the date your money will be repaid (maturity), and the interest rate you receive (coupon). will pay you a loan. money The interest rate is the profit an investor receives for lending money.
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Before issuance, each bond is rated by Standard & Poor's or Moody's, the main rating agencies that determine the issuer's financial ability to service the debt it undertakes. Ratings range from AAA (best) to D (company default).
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The two agencies have slightly different labeling conventions. For example, Standard & Poor's AAA, Moody's Aaa.
Think of a bond rating like a company's credit rating report card. Tier 1 firms with strong financials and stable earnings receive higher scores for their bonds. Risky companies and government agencies with a difficult financial history are rated lower.
Historically, the average yield on junk bonds has been 4-6% higher than US Treasuries. U.S. bonds are generally considered the standard for investment-grade bonds because the country has never defaulted on debt.
The obvious caveat is that junk bonds are a high-risk investment. There is a risk that the issuer will declare bankruptcy and you will never get your money back.
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There is a junk bond market, but it is largely dominated by institutional investors who can hire analysts with credit knowledge.
For individual investors interested in junk bonds, investing in a high-yield bond fund may make sense.
You are dealing with a riskier investment, but you rely on the skills of professional money managers to make decisions.
High-yield bond funds also reduce overall investor risk by diversifying their portfolio across asset classes. For example, Vanguard High Yield Corporate Fund Investor Shares (VWEHX) keeps 4.5% of its money in U.S. bonds and 3% in cash, with the rest spread among Baa3-rated bonds. Fidelity Capital and Income Fund (FAGIX) keeps almost 20% of its money in stocks.
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One important note: Before you decide to buy a junk bond fund, you should know how long you can give your cash. Most investors do not allow withdrawals for at least a year or two.
There's also a point where the premiums on junk bonds aren't worth the risk. You can tell by looking at the yield spread between junk bonds and US Treasuries. The yield on junk bonds has historically been 4% to 6% higher than US Treasuries. If you see your credit spread shrink below 4%, it may not be worth the extra money. risk invest in junk bonds.
Another thing to look out for is the default rate on junk bonds. It can be tracked on the Moody's website.
A final caveat: junk bonds, like stocks, go through boom and bust cycles. In the early 1990s, many bond funds posted annual returns in excess of 30%. Many defaults can cause these funds to produce impressively negative returns.
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When researching insurance companies, you may have noticed that several of the top providers post an AM Best rating. Since its inception, AM Best ratings have become a benchmark in the insurance industry. And while the AM Best rating is just a simple letter grade, it provides a lot of information about an insurance company's financial health that can help.
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