In Your Best Interest by W. H. (Hank) Cunningham

Author:W. H. (Hank) Cunningham
Language: eng
Format: epub
Publisher: Dundurn Press
Published: 2012-01-11T00:00:00+00:00

High-yield or Junk Bonds

With nominal interest rates so low these days (even though real yields are about where they normally are), many investors are tempted to reach for the very high yields offered by corporate bonds issued by companies whose credit ratings have fallen below the investment-grade levels. When that happens, many investing institutions can no longer buy them and, in fact, some may have to sell them. What typically happens is that the price of the bonds falls precipitously, offering what appear to be very high yields. The bid/ask on these types of bonds becomes very wide ($3 to $5), with poor liquidity and sudden, large price swings. Your IAs may offer certain of these bonds to you. Many of these situations have worked out (Telus, Nortel, Hudson’s Bay, and others), but there have been some spectacular flameouts (Air Canada). I recommend the following approach to these “fallen angels”:

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