Supposing a 40% recovery rate and a five year duration, this would be about a 15% coupon give or take. It is highly dependent on recovery rate and duration to dictate yield as well as the default rate.If Treasuries are yielding 4%, what yield would you require before loaning money with a 60% chance of default? And what fraction of your portfolio would you be willing to bet?
Help me understand this a little bit more. I used 90% example because I knew that this has never happened before. But let's say that 20% was worst case scenario in 1990 but now in 2025 we have 40% or 60% or whatever higher than expected default rate. Wouldn't the new investors demand higher yield from the high yield bonds in order to buy them? Since now the new investors are aware that high yield bonds are riskier than what they previously thought they were?
Once you have your number, what company would be willing to pay that interest rate?
Some companies do pay these coupons, but they are often not doing it for long (they default or call back the debt if their situation improves).
Statistics: Posted by secondopinion — Sat Mar 01, 2025 12:59 am — Replies 21 — Views 2508