Dear Mr. Berko: I’m told that junk bonds yield 12 to 18 percent or even higher. I’d like to invest about $60,000 in junk bonds if I could get at least a 12 percent yield to maturity. My stockbroker recommended a bond yielding 15.3 percent and wants to show me other junk bonds he says pay safe, high income. What do you think? Could you recommend a portfolio of junk bonds for me? And could you explain “yield to maturity”?
— B.N., Rochester, Minn.
Dear B.N.: Your broker is a shameless liar. The answer to your second question is “no!” The answer to your third question is “maybe.”
Junk bonds are sometimes called suicide bonds because of their high default rate. Your insurer might cancel your life policy if you owned too many of these bonds — though if you can skip rope on a bed of nails, gargle with Drano and sing “Waltzing Matilda” while sitting on a bed of hot coals, your insurer might only increase your premium and let you keep your policy.
Junk bonds are some of the strangest creatures in the investment universe. A good junk bond broker must have the skills of a septic tank cleaner, a quantum physicist, a mortician and a sewer plumber, so never buy junk bonds from your everyday stockbroker. That would be like asking an electrician to perform brain surgery on your 6-year-old daughter. Junk bonds are just what the name implies — pure, unadulterated junk. They’re high-yield, high-risk, non-investment-grade bonds that are fixed-income investments. They have a Standard & Poor’s credit rating of BB or lower or a Moody’s Investors Service rating of Ba or lower. Many yield over 12 percent, and others can have yields of 700 basis points or higher. Investing in junk bonds is infrequently profitable and not recommended for widows, orphans, orphans of widows or kids younger than 11.
