Ponzi Scheme
A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors'
funds to pay the earlier backers. For both Ponzi schemes and pyramid
schemes, eventually there isn't enough money to go around, and the
schemes unravel.
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BREAKING DOWN 'Ponzi Scheme'
A Ponzi scheme is an
investment fraud where clients are promised a large profit at little to
no risk. Companies that engage in a Ponzi scheme focus all of their
energy into attracting new clients to make investments. This new income
is used to pay original investors their returns, marked as a profit from
a legitimate transaction. Ponzi schemes rely on a constant flow of new
investments to continue to provide returns to older investors. When this
flow runs out, the scheme falls apart.
A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.
BREAKING DOWN 'High-Yield Bond'
Also known as "junk bonds".
Based
on the two main credit rating agencies, high-yield bonds carry a rating
below "BBB" from S&P, and below "Baa" from Moody's. Bonds with
ratings at or above these levels are considered investment grade.
Credit ratings can be as low as "D" (currently in default), and most
bonds with "C" ratings or lower carry a high risk of default; to
compensate for this risk, yields will typically be very high.
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from investopedia
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