Long-Term Debt

Brigham defines a bond as a long-term contract under which a borrower agrees to payments of interest and principal on specific dates to the holder of the bond. Brigham notes that bonds are similar to term loans, but a bond issue is generally advertised, offered to the public and usually sold to many different investors. The chapter also points out that while bonds normally have a fixed interest rate, in recent years there has been an increase in the use of various types of floating rate bonds.

Brigham notes that junk bonds became quite popular in the 1970s. The chapter attributes the innovations in this instrument to Michael Milken of the former investment banking firm Drexel Burnham Lambert. According to the chapter, Milken, initially relied on the historical studies of W. Braddock Hickman (1958). They tended to show that risky bonds yielded more than enough to compensate for

. . .
nificance, meaning that it is perfectly possible for a portfolio of junk bonds to suffer defaults and to outperform Treasuries at the same time, provided the yield spread of the portfolio is sufficiently high to offset the losses from default. Furthermore it is maintained that because holders of defaulted bonds typically recover at least 30% of the face amount of the investment, the default loss rate is substantially lower than the default rate. Therefore, focusing exclusively on default rates merely highlights the worst possible outcome that a diversified portfolio of junk bonds would suffer, assuming all defaulted bonds would be totally worthless (Altman, 1989). However as the Brigham chapter points out, by early 1989 Drexel Burnham Lambert was forced into bankruptcy and Michael Milken was sent to jail. These events tarnished the junk bond market and perhaps point to some weakness in the original analysis made by Milken. It was Hickman's study (1958) that supposedly showed that high-yield bonds had produced a paradoxically higher investment return than high-grade bonds over the first four decades of the century. But Hickman (1958) actually said a great deal more. His study also analyzed the apparent decline in credi
. . .

Some common words found in the essay are:
Insurance Corporation, Summary Brigham, Milken Hickman's, Barrie Wigmore, America American, Introduction Chapter, Issues Brigham, Drexel Burnham, Braddock Hickman, Michael Milken, junk bond, junk bonds, junk bond market, bond market, commercial banks, default rates, earnings taxes, hickman 1958, decline credit, drexel burnham, default rate, decline credit quality, apparent decline credit, portfolio junk bonds, junk bond issues,
Approximate Word count = 1929
Approximate Pages = 8 (250 words per page)

More Essays on Long-Term Debt