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Help me get this straight
Old 01-22-2008, 07:52 PM   #1
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Help me get this straight

Some financial institutions are in danger because of their large holdings of corporate bonds, right?

This is because of the risk of corporate bankruptcy and default?

Because otherwise:

The corporation survives but is downgraded to junk; doesn't this increase the yield on the bonds ?

Doesn't the interest rate decrease increase the yield on the bonds?

Please correct any or all of this, I'm trying to get a grip and it's been a while since Macro. KIS, please.

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Old 01-22-2008, 08:42 PM   #2
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Who are the "Some financial institutions" - this will help with answering your questions.

Most financial institutions being discussed in the news have large holdings of high risk mortgages.

You might want to do some research on bonds. - Your Source For Investing Education

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I don't know of any
Old 01-22-2008, 09:02 PM   #3
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I don't know of any

in danger but some had definitely had trouble with interim financing becoming permanent since they can't sell near par due to increase in the risk premium now required. Bonds becoming junk would increase the yield for a buyer who will demand a greater discount, but not the holder, but as long as they continued to pay, the holder would not realize a loss. Some institutions are required to carry only investment grade and would be forced to sell though. An interest rate decrease will help the company make its payments in the future and will make its bonds more attractive, but only if the decrease is larger than increase due to the rise in risk premium, that is, only if it is a decrease for that bond. The yield may increase but it may or may not increase by as much as it previously decreased. If the yield increased sufficiently, they should be able to sell them, assuming they can find able and willing buyers. If they can't, the yield hasn't increased sufficiently.
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Old 01-22-2008, 10:03 PM   #4
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Just got some info from JPMorgan today. One year ago, the average yield on junk bonds was 6.05 %. As of last Friday, the average yield on junk is 9.14%..........

Bottom line, if you pick the right "junk" you could look like the next Soros or Buffett..............good luck.........
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)

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