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> "Fixed return" isn't really relevant from a practical standpoint because shares and junk debt both have volatile prices... It's absolutely relevant. Sometime
by soVeryTired 8y ago
> "Fixed return" isn't really relevant from a practical standpoint because shares and junk debt both have volatile prices...
It's absolutely relevant. Sometimes junior debt trades a little bit like equity but the point is that bonds mature whereas equity exists for the lifetime of a company.
>... price is what actually matters when it comes to securities like this.
Absolute return is what matters, not price. The return of a bond - junk or otherwise - is known on day one of a bond issuance in the absence of default. That makes fixed income a fundamentally different asset class to equity.
Even a junior perpetual junk bond is different to equity. The junk bond's coupons would be fixed, whereas dividends vary according to company profits.
- all_blue_chucks 8y agoWhat percentage of junk bonds are bought at issuance and held to maturity by investors? 0.5%? Maybe? For literally everyone else, it is, in fact, price that matters.
- soVeryTired 8y ago> For literally everyone else, it is, in fact, price that matters. I made the distinction between price and total return above because an asset's price can remain more or less constant while still being a profitable investment: for example a utility company with a high dividend yield. Let me try another tack. Would you rather own non-voting equity or junior debt in a company that is about to strike a deal that will make them wildly profitable?