What is a Junk Bond?

junk bond money on the hookJunk bonds are considered by the market the bonds that are more likely to produce a default. This debt is issued by companies or states that have a low rating or rating to be at higher risk of default than others with higher quality ratings. Many are the reasons why these issuers have low ratings… from political to the most common, economic reasons. Playpen is a quite common financial situation before bankruptcy. But if these kind of bonds don’t go into default, in exchange for the risks taken offer investors higher levels of profitability.

The rating agencies rating junk bonds are made mainly Standard & Poor’s, Moody’s and Fitch. In the case of Moody’s are all those junk bond issues rated Ba1 or lower and in the case of Standard & Poors all those issues rated at or below BB +. You can check their websites to see their rating system. It is interesting to follow the evolution of the profitability of junk bonds as a whole as they are often one of the most sensitive to indicate the arrival of possible economic downturns assets.

What is a Bond?

investment in bondsA bond is a debt instrument. At the time of the purchase it is known the exact profitability the investor is going to get for that investment. Companies issue bonds to finance new projects or to renovate already existing projects, in exchange of a future money return to the investor.

The return on bonds depends on the strength of the company. Basically, the return of a bond depends on the likelihood that the issuer of the bond (state or corporation) gives the money back. Safer bonds, and therefore less profitable, are generally issued by states. The bonds issued by large companies are slightly more profitable than those issued by states. As the strength of the company is lowering, profitability is increasing, reaching the so-called “junk” bonds, which are really at risk for default.

In practice, the bonds issued by most listed companies have no danger of not being charged, but there are small differences in price. The reasoning is, roughly, the following: equal return on 2 different bonds, prefer buying a government bond that one of General Electric. So General Electric bonds have to be slightly more profitable (a few tenths or hundredths of a point) that the United States Bond for example. Similarly, to equal profitability I prefer to buy a General Electric bond than one of Wal-Mart, and that’s why Wal-Mart’s bonds are likely to be more profitable than General Electric.

Depending on the Duration of the bond, it will have some peculiarities on the way it is dealt. So, with bonds with a duration of more than one year we get what it’s called a Coupon. This coupon is a monetary value in a percentage (%) relation to the capital we paid for the bond.

If a bond is held to maturity then the investor will receive the exact amount agreed at the time of the purchase. But, if sold before it reaches maturity then can get a lower or higher than expected profitability. The longer time remaining to maturity of the bond the more is increased the influence of fluctuations in interest rates in the bond price.

TTIP: Everything you need to know about the trade agreement between the EU and US

trade agreement between the EU and USWhat exactly is TTIP?

It is a framework agreement that seeks to facilitate trade and investment between the US and the EU, to create the largest free trade area in the world with over 800 million citizens/consumers. As tariffs between these two powers are already quite low (around 3%), efforts are focused on what they call “nontariff barriers”. That is, the regulations governing the production and distribution of goods and services, which are quite different and concern in areas such as the manufacture of cosmetics -Europe prohibits the use of 1200 substances while the US only 12. Genetically modified organisms (GMOs) present in over 70% of food in the US and virtually banned in the EU.

What can it bring to the EU?

The Commission estimates that the European economy could grow in the best case, by 0.5% per year, and states that amount “equivalent to about 500 euros per household”. They anger start. Marina Albiol, MEP and spokesman for IU (left wing party) in the European Parliament, believe that we must take “shamelessness” to make this statement, “as if the benefits would be shared with European families. And even if it did, for whom would it be? The chemical industry could have more benefits, but would be for shareholders,” he says. Some experts also note that these forecasting models used by the Commission are the same people who did not see the crisis coming in the US subprime, or those who used the EU to prescribe austerity warn. The alleged generation of job creation does not generate consensus. The best forecasts estimate that 600,000 jobs will be created in 2027.

What’s the secrecy?

In January 2015 the European Ombudsman urged the Commission to improve transparency. “It is acting with complete obscurantism, especially regarding citizenship,” criticizes Marina Albiol, who believes is intentional “because the more people know about the TTIP, the more you stand against.” The European Commission has begun to publish some documents on its website, and go to inform Parliament before and after each round of negotiations.

MEPs have at their disposal some documents (not all) can be found in a small reading room, six square meters without windows. Before entering, they have to leave out mobile, paper, pen and any personal items, and sign a document committing themselves not to disclose information about what to see. Within a pen and they give them a special role, and have an official behind while taking notes.

Who supports the “Yes” vote and the “No”

In favor are the governments of each of the member states of the EU, which drew its mandate to the Commission, and obviously businesses, which were also represented at the Brussels seminar. In the European Parliament the support groups of the European People’s Party (EPP), the Alliance of Liberals and Democrats (ALDE) and the Socialists and Democrats (S&D) having some internal division. They oppose the treated groups United Left (GUE / NLG) and the Greens (The Greens / EFA), and also the extreme right. Civil society has been actively mobilized against TTIP.

Lobbies Say What?

Companies are delighted. Business Services, argues that the TTIP facilitate the Europeans to move to America to work, or that European companies can compete in public contests there. Business Europe believes will help SMEs to access the US market, and as many advocates said that the standards of US and EU are similar, especially when compared to countries like Vietnam, which together can help establish international standards.

COPA-COGECA, the association of European farmers and winers, believes it will be good to facilitate the entry of European products in the US, but says he would not be willing, for example, to allow growth promoters (hormones) in bovine. The European Consumers Association (BEUC), also believed to be positive because it will have a wider and cheaper product offer.

Those who oppose TTIP claim that the meetings that the European Commission had to prepare for negotiations, 92% was with the private sector, and only 4% with advocacy public groups of interest and 4% with other actors such as academic experts and public administrations.

Why is there so much controversy?

There are several thorny issues that ignite all alarms. The European Commission has endeavored to clarify “myths” about the TTIP, by publishing documents and summary sheets. Reading them seems to be nothing to worry about. The Commission ensures no loss of sovereignty of member states, as feared, with arbitration tribunals or the process of regulatory cooperation, that workers’ rights and consumer protection will not be compromised and that public services they will be insured.

Is it undemocratic for citizens?

Arbitration courts are one of the hottest points of the debate. United States has not acted, and is waiting for the EU to reach a common position. These courts (in English ISDS) are private mechanisms to settle disputes between states and investors.

The European left-wing parties go far beyond and is resolutely opposed. They believe that these courts would inhibit not only short term but stably the ability of states to legislate for the rights of their citizens.

What’s left for workers?

TTIP detractors fear that by increasing competition with the US, labor rights, more established in the EU, resently. The United States has ratified only two of the eight core conventions of the International Labor Organization (ILO), and the most critical MEPs see a problem here. The Spanish Rodríguez Piñero believes it will be difficult for Washington to sign them all, because it says that the powers are federal states. It also downplays the ILO Conventions: “You tell me in Romania ILO Conventions … The red line are labor rights, and we will have to see how are they guaranteed”.

Threat to our health? And the Public sector?

The European Commission ensures that only a legislative harmonization where regulation between the US and the EU is similar, as in the automotive industry apply. For the rest, such as genetically modified organisms or cosmetics, it promised that the EU would maintain its high levels regulatory and TTIP not change the treaties establishing the European legislative process.