Word: junks
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Despite their name, junk bonds -- more politely known as high-yield, high- risk bonds -- often serve a useful financial purpose. Companies that are too small to issue blue-chip bonds can use high-yield securities to raise money for expansion. Because their debt is considered riskier than the bonds of their larger brethren, the junk issuers must pay five percentage points or more above the prime rate...
During most of the decade, junk-bond defaults ran at an annual rate of only 2% to 3%. But now that the economy is shaky, some analysts predict that defaults could hit 10% to 15% of the $200 billion market this year...
While S&Ls own 7% of all junk bonds, depositors will be shielded from loss if a thrift runs into trouble because the Government insures deposits up to $100,000. But the junk-bond slump could increase the already enormous taxpayer cost of the Bush Administration's S&L bailout package (anywhere from $160 billion to $300 billion), since the Government will have to sell the securities at a loss...
Mutual funds own 30% of all junk bonds. Funds that promise "high income" or "high yield" are generally the ones that invest heavily in junk. Most prudent fund managers have been switching during the past year to more creditworthy issues, including Kroger and Fort Howard Paper. Yet the depressed market value of most junk securities means that fund investors who sell out now "will take some pretty substantial losses," according to Brian Ternoey, an employee-benefits consultant in Princeton, N.J., who advises clients to wait for the market to rebound...
Insurance companies own another 30% of junk bonds. While most firms concentrate no more than 8% of their assets in the securities, a few have gone beyond the safety zone. Junk bonds account for more than 35% of the $19 billion in assets held by First Executive of Los Angeles.The firm's heavy reliance on junk may make it difficult for First Executive to meet its obligations, thus posing a danger to retirement funds that the company manages...