The risk of bonds

The recent news on the pre-packaged bankruptcy plan of CIT, is a real life example of the benefits and perils of investing in bonds. Up until the news of CIT's filing on Sunday night CIT bondholders were getting a 7.75% yield on their bonds. Stockholders had already seen their stock price plummet from a high as late as 2007 from over $60 per share to around $1. The news of the bankruptcy sealed the fate of the stockholders and even preferred stockholders, they will end up with nothing for their investment. But bondholders, will end up with 70 cents on the dollar, or a 30% loss on their principal. Nothing to really cheer about, but at least they walk away with most of their original investment returned. Works out to about the same kind of loss many people experienced in the stock market collapse of 2008. Had CIT not filed bankruptcy, these bondholders would have continued to collect their 7.75% coupons until maturity and then get their original investment returned, at least that is the way it was supposed to work. CIT's failure will be the 5th largest bankruptcy filing in history. While these types of events are bad news for investors of all types, it shows the benefits of being a bondholder over a stockholder. I would much rather try to make up a 30% loss than a 100% loss!