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Practical Applications

Practical Applications

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Practical Applications of Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?

Edward I. Altman and Mike Harmon
Practical Applications 9 (3) DOI: https://doi.org/10.3905/pa.9.3.465
Edward I. Altman
is the Max L. Heine Professor of Finance, Emeritus, at the Stern School of Business at New York University and the director of Research in Credit and Debt Markets at the NYU Salomon Center for the Study of Financial Institutions in New York, NY
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Mike Harmon
is the Managing Partner of Gaviota Advisors, LLC, in Manhattan Beach, CA, and a Lecturer at Stanford University Graduate School of Business in Stanford, CA
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Abstract

In Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?, which appeared in the November 2021 issue of The Journal of Portfolio Management, authors Edward Altman (Stern School of Business, New York University, and NYU Salomon Center for the Study of Financial Institutions) and Mike Harmon (Gaviota Advisors, LLC) attempt to determine whether current market factors have driven a “bubble” in the US high-yield bond market.

In order to determine whether the current market conditions in high yield truly represent those of a “bubble,” the authors analyze the highest-risk segment of this market. Based on historical average default and recovery rates, they conclude that the expected returns from the securities analyzed are not commensurate with the high risk associated with those securities. Furthermore, the authors’ analysis of key factors influencing future default and recovery rates yields the conclusion that there are more potential scenarios for investors to underperform than there are for investors to outperform. Although the conditions analyzed do not represent a true “bubble” as defined by the authors, they do express concern over other potential negative repercussions resulting from investors’ assumption of excessive risk.

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31 Jan 2021
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Practical Applications of Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?
Edward I. Altman, Mike Harmon
Practical Applications Jan 2022, 9 (3) DOI: 10.3905/pa.9.3.465

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Practical Applications of Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?
Edward I. Altman, Mike Harmon
Practical Applications Jan 2022, 9 (3) DOI: 10.3905/pa.9.3.465
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  • Article
    • Abstract
    • Overview
    • Practical Applications
    • Key Definitions
    • Discussion
    • WHAT IS A BUBBLE?
    • ANALYSIS OF CURRENT MARKET TRENDS
    • KEY FACTORS INFLUENCING FUTURE RESULTS
    • CONCLUSIONS
    • Edward I. Altman
    • Mike Harmon
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