To capitalize this entrepreneurial approach, the banks should be able to sell these higher-yield, lower-risk mortgages to be bundled into bonds that investors would find attractive because of the premium yield, stable revenue stream, and equity kicker.
As default risk is the primary driver of high-yield corporate bond prices, as opposed to interest rate direction, when the economy expands, the risk of high-yield corporate bonds defaulting is reduced and this is reflected in lower volatility.
Mr Neels also worries that airline bosses' financial incentives make them do things that yield short-term profits but risk harming their firms' reputations.
No individual investor would ever have the financial incentive or wherewithal to bring a complicated case showing that Schwab had loaded its Yield Plus Fund with high-risk bonds.
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The consistency of the cash flows and ample coverage allows investors to collect a very attractive risk-adjusted yield.
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The notion that owning high-risk stocks will yield high returns over the long haul is a bedrock of modern finance.
With the exception of the late spring, when bad news from Europe caused a brief sell-off, investors have bid up stocks, high-yield bonds, and most other risk assets.
The remaining yield on longer-term bonds is a risk premium that is commensurate with U.S. interest-rate volatility (Japanese risk premiums are lower, but they also have nearly zero interest-rate variability).
Diversification, attention to debt levels, and being aware of the risks in each individual stock will help build a portfolio that pays an above-average dividend yield but also mitigates risk.
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For example, we could increase the duration of our investment portfolio, we could go out and buy a lot of securities that have good short-term yield but have higher credit risk.
Typically mutual funds is where we are looking at quite substantially right now for really one reason, and those tend to trend better with a lot less risk, so you know you can have market-like rate of return on high-yield-bond mutual funds with historically a third of the downside risk of the markets.
We believe that during economic expansion, the default risk associated with high-yield corporate bonds lowers.
And the dividend yield is competitive with that of certain risk-free government bonds.
Today, insurance companies have an average of 12% of their assets in risk assets that include high-yield public equity, private equity and real estate equity.
Using the era's best computers, Milken calculated that he could dive down to the swamp's bottom and rescue the credit unworthy ... if he could pool enough of the poor suckers into one high-yield bond and price it appropriately for the risk.
Yet in a sign that investors remain more risk-averse to Italy, the yield on Italian 10-year bonds on Tuesday increased to 5.8% from 5.6% on Monday.
Basically, investors are willing to pay more, or accept a lower yield, on a shorter-term bond because there is less risk.
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Finally, realize that even in the current low interest rate environment, short-term, low-yield bonds offer the advantage of liquidity and little downside risk, allowing them to potentially play an important role in your portfolio.
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"Apple bonds are a low-risk alternative to Treasury...bonds in this yield-grabbing environment, " said Mark MacQueen, co-founder and portfolio manager at Sage Advisory Services Ltd.
Investors fleeing from risk drove the dollar up and pushed the yield on one-month Treasury bills into negative territory for the first time in ten months.
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He says risk-averse investors need not settle for the 4% yield on ten-year government bonds.
But the short-term strategy they employed is a solid one that, if implemented on day 1, can yield a solid profit for investors while minimizing the risk associated with a long-term investment horizon.
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For not all bonds are created equal, and investors may be unwittingly increasing their exposure to equity risk by allocating portions of their fixed income exposure to high-yield bonds, which behave much like equities.
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Conversely, during risk-on episodes, investors pull out of Treasuries and reach for yield in more risky type of investments.
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Investors will buy subordinated debt at a yield quite close to the riskless rate only if they are sure the bank is low-risk.
An auction of German 10-year bunds Wednesday produced the lowest yield since last July, which underscored the keener risk aversion in the market place this week.
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For now, the historical euro risk-averse sanctuary remains at the very short-end of the German yield curve.
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Investment-grade corporate bonds, which carry only a sliver of default risk, now yield an average 1.8 percentage points more than Treasurys, up from 1.3 points in early 2000.
When debt is treated more like a utility, with the lender managing risk so there is a high probability the loan and the agreed-upon yield will be paid, such lending is more consistent with its economic purpose.
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Pegging the federal funds rate close to zero for another three years and twisting the yield curve to lower longer-term rates will continue to misprice credit, penalize saving, and encourage risk.
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