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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Bailout Bond

What it is:

A bailout bond is intended to help ailing companies. Bailout bonds were most common in the 1980s and 1990s when many savings and loans were failing; they are less common  now.

How it works (Example):

Company XYZ is in the newspaper industry and has seen a dramatic downturn in its advertising sales. The company's board believes that if it can launch an interactive digital version of its product, which has been in development for two years, it could become a viable business again.

Company XYZ publishes the only paper in the county, and Company ABC loves the newspaper. Company ABC agrees to buy bonds from Company XYZ, giving it enough money to launch the new digital product.

Sometimes governments indirectly issue bailout bonds. In the 1980s and 1990s, the Resolution Trust Corporation issued bailout bonds to help failing savings and loans. The U.S. Treasury agreed to guarantee the bonds.

Bailouts can be loans, but they can also be stock, cash, bonds, or other forms of money.

Why it Matters:

Bailout bonds essentially get companies out of trouble. Because they are bailouts, bailout bonds are a challenge to capitalism in its purest sense. Critics of bailouts argue, for example, that companies should be left to succeed and fail on their own merits, and that supply and demand in the free markets will always determine the worth of goods and services. Supporters of bailouts argue that bailouts are sometimes the lesser of two evils when it comes to a company failing and displacing thousands of workers.

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