Bonds/Debentures

For now, I myself am very skeptical about buying bonds/debentures from companies, and I doubt that I will ever buy one in the future. Apart from the Australian Capital Reserve mentioned in the slides, which is a good example of the cons of lending money to risky companies, but another great example would be the 2008 Lehman Brothers incident in the US.

From my own understanding, the Lehman Brothers were an investment company who offered subprime mortgages to people with insufficient savings who plans to invest into property, in turn charging these “high-risk” borrowers a higher interest rate. On the other hand, they also sell bonds/debentures to another party of lenders whom they promise a high return from interest (since the mortgages they offer have been charged with high interest rates). In fact, what they promise do not differ greatly from that of the ACR. And once these “high-risk” borrowers are unable to repay their mortgages, a chain of reaction occurs, with most of the lenders suffering great loss or losing completely.

The tragic realization behind this is that even a company with such a good reputation (Lehman Bros.) could go completely wrong and this serves as a crucial reminder for me to think twice before buying bonds/debentures.