Timeline for Simple (?) question about expected bond returns
Current License: CC BY-SA 4.0
8 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| May 4, 2022 at 15:23 | vote | accept | ChrisJ | ||
| May 3, 2022 at 22:50 | comment | added | Dimitri Vulis | There were several papers in the 1990s by Bielecki and by Duffie and Singleton, discussing how a fair value of a risky bond could be computed, similar to pricing a credit default swap, out of probability of default, and loss given default (both of which should ideally have term structure). Any day, with probability PD on that day, the bondholder receives 1-LGD on that day; else, with probability 1-PD, he receives the promised payments. Discount with the cost of financing, and sum up to get fair dirty price. If you have Bloomberg, "VCDS<Go>" does this. But you need cash flows, not just yield. | |
| May 3, 2022 at 11:04 | answer | added | ChrisJ | timeline score: 0 | |
| May 2, 2022 at 15:26 | comment | added | nbbo2 | My professor used to say that the YTM should really be called the PYTM (the Promised Yield to Maturity, i.e. assuming that there is no default). The expected return taking prob of default into account is presumably lower, although as fesman said not straightforward to calculate. Clearly buying the bond with the highest PYTM thinking it is the best return is a fallacy. | |
| May 2, 2022 at 7:56 | comment | added | fes | You are correct that 1) higher YTMs of riskier bonds doesn't imply higher expected returns, 2) it is not straightforward to evaluate the expected return. Theoretically you would prefer bonds with best expected returns relative to risk (beta). | |
| May 1, 2022 at 16:23 | history | edited | ChrisJ | CC BY-SA 4.0 |
[Edit removed during grace period]
|
| S May 1, 2022 at 15:33 | review | First questions | |||
| May 2, 2022 at 3:37 | |||||
| S May 1, 2022 at 15:33 | history | asked | ChrisJ | CC BY-SA 4.0 |