maturity will turn out to be higher than expected as the holder reinvests
the coupon payments at a rate higher than 8 percent. If interest rates fall,
the yield to maturity will turn out to be less than 8 percent.
For global investors, future exchange rate movements on foreign investments and possible changes in tax requirements both at home and
abroad are additional risks to consider. Many of the risks encountered in
this chapter can be hedged with instruments designed for this purpose. A
discussion of hedges will be found in Chapters 9 and 10.
Altman, The High Yield Debt Market, 45, Table 3-1.
Kevin J. Perry and
Robert A. Taggart Jr., "High Yield Debt as a Substitute
for Bank Loans, " in
Altman, The High Yield Debt Market, 187, Table 15-1.
For example, Chrysler Corporation issued $800 million of thirty-year debentures in 1985 with a coupon of 12 percent and Resorts International issued $200
million of B + rated 20-year debt in 1984 with a coupon of 16.25 percent. The
prices of the bonds fluctuated over time. Currently, Chrysler's 12's of 2015 are
rated BB - and it was priced at 633/4 (in October of 1991). Resorts International's
16.25's have been renegotiated as a result of its reorganization plan.
When RJR Nabisco's management announced a management led leveraged
buyout in October of 1988, the price of its A - rated paper declined 20 percent
even before their credit rating was officially downgraded. Standard & Poor's placed
the issue on its Credit Watch list and Moody's also indicated that it was being
watched. (The credit rating change occurred several months later, in March of
Altman, The High Yield Debt Market, 49, Table 3-3.
Altman Edward. ed. The High Yield Debt Market, Investment Performance and
Economic Impact. Homewood, Ill.: Dow Jones-Irwin, 1990.
Fabozzi Frank, and
T. Dessa. Bond Markets, Analysis and Strategies. Englewood
Cliffs, N.J.: Prentice-Hall, 1989.
Francis Jack Clark. Management of Investments. 2d ed. New York: McGraw-Hill, 1988.
Moody's Bond Record. New York: Moody's Investor Service.
Standard & Poor's Bond Guide. New York: Standard & Poors; Corp.
Stocks, Bonds, Bills, and Inflation: 1989 Yearbook. Chicago, Ill.: Ibbotson Associates, Capital Market Research Center, 1989.