Editor's note: Toys "R" Us was the first domino to fall.

But Stansberry's Credit Opportunities editor Mike DiBiase says it certainly won't be the last.

As he explains in today's Masters Series – adapted from a brand-new special report – you can take advantage of the coming crisis through a rare type of investment most folks ignore...

The One Question You Must Ask Before Buying a 'Penny Bond'

By Mike DiBiase, editor, Stansberry's Credit Opportunities

The world's smartest investors don't lose sleep during a crisis.

That's because they are prepared. They take advantage of a sophisticated type of investment that most investors know nothing about. And they use it to make loads of money when everyone else is selling. It's a rare type of corporate bond we call a "penny bond"...

These bonds are different from the "bonds" in your 401(k). They have nothing to do with "bond" mutual funds... U.S. Treasury bonds... or bonds issued by blue-chip companies like Apple (AAPL), which are little more than a way to park money and earn 2% interest.

Penny bonds also have nothing to do with risky "penny stocks." Penny stocks are generally considered highly speculative and full of risk. Buying the right penny bond is the opposite... It's one of the safest strategies you'll find anywhere in the markets.

First, let's start with the basics about corporate bonds...

Corporate bonds are debt instruments issued to the public. They're typically issued in increments of $1,000, known as the "par value" or "principal" of the bond.

Unlike a share of stock, a bond is a legal contract between the issuer (company) and buyer of the bond. That makes them much safer than stocks. The buyer is legally entitled to collect the full $1,000 par value on the stated maturity date of the bond, regardless of what he paid for the bond.

Along the way, the buyer is also entitled to receive regular interest payments (usually every six months) for lending the money. The company doesn't have a choice... It has to pay you.

That's how most bonds work. And most bonds are pretty ordinary investments... They yield between 2% and 5%, on average, per year – almost exclusively from the interest.

Yield to maturity ("YTM") is a key term you need to understand when buying bonds...

It's simply the annualized return you can expect to receive if you hold the bond to its maturity. YTM is a combination of the interest you'll receive while you hold the bond and the capital gains you'll earn when you're paid the full $1,000 par value at maturity.

Bonds are also much easier to analyze than stocks. That's because they're binary.

With corporate bonds, you only have two possible outcomes: The company either pays you what it owes you, or it doesn't. That's it... You can completely ignore daily fluctuations in the price of the bond after you've bought it.

If the company pays you all of your interest and principal, you know exactly what return you'll make on your investment at the time you buy the bond. And if the company doesn't pay, it's considered to be in "default" on its debt and lenders can force it into bankruptcy.

So when buying a corporate bond, the only question is: Will the company stay in business and pay you all of your interest and principal through maturity?

It's really that simple.

Can It Pay Us?

We only care whether a company can pay our interest and principal. That's all that matters when investing in bonds. In Stansberry's Credit Opportunities, we always analyze two factors to determine that...

1. Whether the company can afford the annual interest costs on all of its debt, and

2. Whether it will have enough cash on hand to pay off our bond at maturity.

The first question is the most important... If the company can't afford to pay the interest on all of its debt (not just our bond), its lenders can force the company into bankruptcy.

We'll never recommend a bond from a company that we believe will go bankrupt.

To answer the first question, we look at the company's "interest-coverage ratio." That's how many times the company's "cash profits" cover its interest costs. (Cash profits are the cash that a company produces from its core operations. The metric can be found in a company's statement of cash flows under the "net cash provided by operating activities" line.)

The formula most analysts use to measure interest coverage is accounting earnings before interest and taxes ("EBIT") divided by interest expenses. We like to use cash profits before interest instead. Unlike accounting earnings, cash profits can't be faked. Cash profits don't include any management estimates, which can be easily manipulated by management.

We like to see interest-coverage ratios of at least two times. Beyond whether the company can afford its interest payments, this ratio also gives us a gauge as to how difficult it will be for the company to refinance its debt. The lower the ratio, the more difficult it will be.

The second question tells us how the company will pay us our principal when it's due. If we project that the company won't have enough cash in the bank at maturity to pay our recommended bond, we know it will need to refinance its debt with other loans to pay us.

That's OK... We don't care how we get paid, as long as the company does it.

In addition to these two questions, we also perform a liquidation analysis for every bond. We need to know our worst-case scenario... what would happen in case of a bankruptcy.

As we explained, we'll never recommend a bond that we think is in danger of bankruptcy... But we can't guarantee that it will never happen. Every investment comes with some level of risk. We always look for returns that are high enough to compensate us for these risks.

Penny bonds are different from most corporate bonds in one critical way... They trade for a fraction of their contractual par value – at discounts from par value from 10% to sometimes more than 70%.

Despite their lower prices when you buy them, these bonds work the same way...

The companies that issued these penny bonds have the same obligation to pay you $1,000 at maturity, even though you only pay a fraction of the usual $1,000 cost. That enables you to earn large, equity-like capital gains with a much safer investment than stocks. Plus, you collect interest payments that can be up to 20% per year of the amount you invested.

Most people don't know that it's possible to buy this type of bond as an individual investor...

The key to this type of investment is knowing which bonds will pay you, and which ones won't. If you can find penny bonds that you know will be paid in full at maturity, you can make massive, equity-like returns with far less risk than investing in the stock market.

But finding truly great, safe penny bonds with extraordinary returns is only possible in rare moments of crisis... like the one we're about to enter as the wall of maturities unfolds.

The coming crisis will make it possible to buy high-quality bonds for $0.60... $0.50... even as little as $0.30 on the dollar. That's partially because of investors' herd-like mentality...

Just like stocks, bonds trade in a public market that is heavily influenced by emotions and liquidity. When enough investors become fearful, panic sets in... And everyone starts to sell.

But there's another major reason that the bond market reacts violently in times of a crisis...

You see, most corporate bonds are not held by individual investors. Instead, they're held by big institutions like mutual funds, pension funds, and insurance companies. These institutions have policies that require their holdings to be rated "investment grade."

Credit-ratings agencies assign a rating to most bonds, depending on how safe they believe the bonds to be. Ratings range from "AAA" (safest) all the way down to "CCC" (riskiest).

The lowest rung on the "investment grade" ladder is "BBB." When a corporate bond with a "BBB" rating gets downgraded, it's moved into "noninvestment grade" or "junk" status ("BB" or lower). When that happens, big institutional investors are forced to sell their positions.

This is important because roughly half of all investment-grade bonds today are rated "BBB." That number has quadrupled over the past decade. And as interest rates rise and the wall of maturities unfolds in the coming years, we believe many of these bonds will be downgraded to junk status.

That means we're going to have plenty of attractive opportunities to scoop up safe penny bonds...

Thousands of portfolio managers will be forced to sell their safe bonds for no other reason than they've been downgraded by the credit agencies. And since the bond market is much less liquid than the stock market, there aren't enough buyers to absorb the increased supply. Massive selling will force prices much, much lower... And these safe bonds will trade for pennies on the dollar.

We saw this new crisis approaching three years ago...

That's why we launched Stansberry's Credit Opportunities in November 2015. Since then, we've recommended 22 penny bonds and closed 15 positions with an 87% win rate. Remember, these recommendations all have legal protections that no stock can ever offer.

Meanwhile, the average annualized return of our closed positions is 33%. That's almost double the return of the stock market... The benchmark S&P 500 Index's weighted return during the same period is 17%. And beyond that, it's three times better than the return of the overall "junk" bond market's return of 10% in the same stretch.

Keep in mind... we've booked these impressive gains before any panic has set in. The biggest opportunities are still ahead of us.

Good investing,

Mike DiBiase

Editor's note: We've spent $2 million building a team of lawyers, accountants, and analysts to find you the best "penny bonds" in the market. They would be worth millions to a private-equity firm or hedge fund. We also spend more than $100,000 a year on data alone. It's the only way for the team to analyze the universe of more than 6,000 bonds – every month – to turn up the "outliers" with incredible yields and capital upside.

We just put together a brand-new presentation that will show you everything you need to know about penny bonds. Watch it here.