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Bad Paper

What is 'Bad Paper'

Unsecured short-term fixed income instrument that is issued either by a corporation, city, state or country, that has a high probability of defaulting on their promissory notes. Since bad paper is not backed by collateral, it is sold at a discount to the equivalent collateral-backed fixed-income securities. However, in contrast to regular commercial paper which typically has a strong rating from a credit agency, bad paper does not possess this quality.

Explaining 'Bad Paper'

Bad paper is risky. Not only is it not backed by collateral, it is also issued by an entity that could potentially fail to meets its obligations. Bad-paper investors take on high levels of risk and, as a result, would be offered an attractive interest rate as proper compensation.


Further Reading


Emerging capital markets in turmoil: bad luck or bad policy?
ideas.repec.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

Rational herding in financial economicsRational herding in financial economics
www.sciencedirect.com [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

The problem of bad debts: Cleaning banks' balance sheets in economies in transitionThe problem of bad debts: Cleaning banks' balance sheets in economies in transition
ideas.repec.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

Economy-wide corruption and bad loans in banking: international evidenceEconomy-wide corruption and bad loans in banking: international evidence
www.tandfonline.com [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

What Makes a Good" Bad Bank"? The Irish, Spanish and German ExperienceWhat Makes a Good" Bad Bank"? The Irish, Spanish and German Experience
ideas.repec.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

Currency and financial crises in Turkey 2000–2001: bad fundamentals or bad luck?Currency and financial crises in Turkey 2000–2001: bad fundamentals or bad luck?
onlinelibrary.wiley.com [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

Do democratic transitions produce bad economic outcomes?Do democratic transitions produce bad economic outcomes?
pubs.aeaweb.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

It is not always bad news: Illustrating the potential of integrated reporting using a case study in the eco-tourism industryIt is not always bad news: Illustrating the potential of integrated reporting using a case study in the eco-tourism industry
ideas.repec.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

How bad was it? The costs and consequences of the 2007–09 financial crisisHow bad was it? The costs and consequences of the 2007–09 financial crisis
ideas.repec.org [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …

The good practices manifesto: Overcoming bad practices pervasive in current research in businessThe good practices manifesto: Overcoming bad practices pervasive in current research in business
www.sciencedirect.com [PDF]
… "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT … F0 - International Economics - - General; G01 - Financial Economics - - General - - - Financial Crises; O16 - Economic … Financial Markets; Saving and Capital Investment; Corporate Finance and Governance …



Q&A About Bad Paper


Is bad paper backed by collateral?

No, it is not backed by collateral.

Who issues bad paper?

Corporations, cities, states and countries issue bad paper.

What is bad paper?

Bad paper is unsecured short-term fixed income instrument that has a high probability of defaulting on their promissory notes.

Why would someone invest in bad paper?

Someone might invest in bad paper because they are offered an attractive interest rate as proper compensation for taking on high levels of risk.

What does the term "discount" mean in regards to bad paper?

The discount refers to the difference between the price of an asset and its market value. In this case, it means that investors are willing to pay less for the security than its face value because they believe there is a high possibility that it will not be repaid.