Screening mechanism

Faced with this sudden question, Renoson and Sanchez were completely dumbfounded, as these two "geniuses" had never actually bothered to understand the operational logic of bonds.

However, this behavior was quite normal. Before investing in a financial product, most people would at most look for relevant information to see if the product or the company was reliable.

It was already quite rare for someone to specifically find a few friends who had invested in such products to learn more about them.

Who would go through the trouble of trying to understand the underlying operational logic and rules? Wouldn't that be like taking off your pants to fart?

They were investors, not bond issuers.

Seeing the bewildered looks on Renoson and Sanchez's faces, Wang Xiuyuan was certain that these two actually knew nothing.

Renoson and Sanchez's performance fully validated a truth: rich people are actually no different from us ordinary folk.

They just don't have to scramble for a living, so they have plenty of time to think and learn, but in essence, everyone is the same.

With a little bit of packaging, these so-called rich people will fall into the same pits.

Many tricks used to swindle ordinary people were actually originally designed to fleece the rich. Only after the rich got tired of being scammed and wised up did these low-level tricks trickle down to ordinary people. Isn't the Madoff scheme a classic case?

How much money can you really make by painstakingly scamming a bunch of ordinary people?

"Sigh, you two are lucky today. If you hadn't met Mars and me here, you would have definitely been scammed until you didn't even have your underwear left."

"Losing money is a minor issue; the most important thing is losing face."

"At that point, you could have gone straight to the Empire State Building to perform a high-altitude elbow drop on the asphalt."

Wang Xiuyuan dipped his finger in his wine glass and began to sketch on the tabletop.

"These bonds are actually IOUs from a cash-strapped company borrowing money from the public. These high-yield bonds you bought mean you are directly lending money to this cash-strapped company."

"This company pays you interest every year according to the bond agreement. That’s why your friends said they received interest. But compared to the principal, what is the interest worth?"

"Have you asked them if any of them have gotten their principal back?"

"The principal can only be recovered when the bond matures, provided the debtor has the money to pay you back."

"The company Rudolph works for is just the underwriter for these bonds. They only play the role of a financial intermediary. Once you buy the bonds, it has nothing to do with them anymore."

"If the company that issued the bonds goes bankrupt due to poor management, the fact that you can't get your principal back has absolutely nothing to do with the underwriting company Rudolph represents."

"Because these bonds are actually a debt dispute between you creditors and the debtor company. Even if you sue Rudolph's company, it's useless; you have no chance of winning."

"Suppose I borrow ten million dollars from you with a five-year term. During these five years, I only need to pay you interest every year."

"If the company is well-managed during these five years and can pay back the ten million dollars with interest upon maturity, then the issuance of these bonds indeed saved the company."

"But you've overlooked one problem: excessively high interest is like a knife slitting the company's carotid artery; it will rapidly deplete the company's vitality."

"Originally, a gross profit of two million a year could sustain the company and reach a break-even point."

"But now, because of this ten-million-dollar debt, two million dollars in interest alone will create a hole every year. So, it must earn four million dollars in gross profit every year just to stay alive. Anything less than that will result in a loss."

"Is that figure really that easy to achieve?"

"If it could be achieved, there would be no need to issue bonds with such high interest rates. Normally, a 5% interest rate would have a crowd of people fighting to buy them."

"Now, 20% high interest still requires a dedicated company to market it. If this isn't a junk bond, what is?"

Renoson and Sanchez suddenly saw the light.

"I get what you mean. Once the bonds are in my hands, Rudolph and his company have nothing to do with us."

"When we want our money back, we have to go directly to the company that owes us. If that company can't pay and goes bankrupt, our money is gone. Is that it?"

"Exactly, that's what it means."

Wang Xiuyuan nodded in affirmation.

"According to your logic, companies in good operating condition can easily issue low-interest bonds to raise funds from the market. These high-interest bonds themselves indicate that the company has operational problems."

"Then why don't these companies issue a batch of bonds with interest rates just slightly higher than normal?"

"Wouldn't that lower the cost of capital, making it easier for the company to survive and also easier to raise funds?"

For a moment, Wang Xiuyuan didn't know how to answer. It wasn't that he didn't know the reason, but he hadn't decided on the right wording.

Seeing Wang Xiuyuan's conflicted expression, Sanchez couldn't help but speak up.

"Is this question that hard to answer? Just say whatever comes to mind; it's fine, we don't mind."

"Are you sure you and Renoson won't mind? Do you swear?" Wang Xiuyuan looked at Renoson and Sanchez with a strange expression.

"I swear. Just say it, speak your mind."

"Yes, just say it. I promise not to get angry."

Both Renoson and Sanchez vowed their promises to Wang Xiuyuan. Since that was the case, what else could he say? He'd just state the result directly; as for whether the wording was pleasant, forget it.

"Alright then, since you put it that way, I'm relieved." Wang Xiuyuan cleared his throat.

"Actually, this company intentionally issues such ultra-high-interest bonds for only one purpose: to precisely screen its target audience."

"What?"

"What do you mean?"

"What does this 'screening' mean?"

As soon as the phrase "precisely screen its target audience" came out, Renoson, Sanchez, and Mars were all incredibly surprised.

"Literally. With such high interest, anyone in the financial industry or with rich investment experience can sense that something is wrong."

"Therefore, these people wouldn't even consider buying these high-yield bonds."

"Even if bonds were issued at normal interest rates, these two types of people would still use various means and channels to understand the company's true operating condition. They still wouldn't buy; at most, it would just waste a bit of their time."

"And who knows, there might be one or two people who get extremely annoyed by the wasted time and step forward to expose the whole thing. That would only bring trouble to the company."

Mars exclaimed, "So the ultra-high interest is actually a sieve deliberately set up to exclude professionals. Everyone who comes to inquire about this stuff is a layman."

"Exactly! Mars, you have a real talent for this." Mars's summary was spot on, and Wang Xiuyuan was not stingy with his praise.