This Week’s Topic: A Risky Looking Bond May Not Be What It Appears
Many investors who are tolerant of the risks of owning stocks, even growth stocks with outrageously high price/earnings ratios, categorically refuse to consider a below investment-grade bond. These lower rated bonds are called High Yield (or Junk) Bonds. This may be overlooking a potentially profitable security whose risk characteristics you may find acceptable as a part of your portfolio.
Understanding a corporation’s financial situation and the research analysis which has lead to its stock being recommended may go a long way toward easing fears of purchasing a BB-rated situation. A “Make Whole Default Call” may also bring added comfort.
Similarly, bond ratings do not change as quickly as the news that leads to them. Simply asking about any pending take-over details or presence on the “Watch List” for positive indications can make a B3/B- bond look more like the Aa3/A+ bond of its acquirer.