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Originally Posted by KillerGremlin
For the Nth time, I'm a total finance noob, but it seems like stakes are high for investors and promises aren't really a promise. Like what about the hedge fund investors? I'm not sure how hedge funds work, but aren't the investors kind of getting the shaft by not getting their promised money? Or is investing in a company kind of like investing in the stock market...almost a gamble where you could lose money or turn a profit.
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Well, an investment is only guaranetted to be paid if it is insured by the FDIC. If you look at Citigroup and other companies that the government has taken over, if you want to invest in their corporate bonds, they are now FDIC insured, meaning if the corporation is unable to pay you back, the government will be the creditor of last resort and pay you.
Corporate bonds and such are only paid back to the investor if the company has enough money to pay you your interest and its creditors. In the event that the corporation becomes illiquid and unable to pay back its creditors, the corporation can file for bankruptcy and no longer have to pay the investor. There is no guarantee.
The issue is two-fold. One, corporate bonds and such are rated by agencies such as Moody's, and many of these ratings were inaccurate and did not properly identify the amount of risk the investor was undertaking. Two, there is a moral issue when the government overtakes some companies that cannot pay back their creditors, but not other companies.
Edit: Not even municipal bonds (investing in local municipalities) are guaranteed. The only "truly safe" investment is in treasury bonds, in which the government guarantees to pay you back. This is why everyone is buying treasury bonds right now, even though their yield is extremely low, at around 3%. Of course this yield is artificially low due to the Federal Reserve, but that is a whole other issue.