We believe that during economic expansion, the default risk associated with high-yield corporate bonds lowers.
The default risk resides with the Greek central bank and, ultimately, the Greek government.
Taxpayers already bear the default risk on these loans, which are made without regard to credit history.
There are a couple of factors that seem to exacerbate an organization's exposure to default risk, too.
The measures he took helped to convince investors that his country was not a potential default risk.
In some industries, like the consumer-reliant retail sector, the default risk is directly tied to reduced consumer spending.
Yet, inexplicably, they do not contain the information about individual loans that is needed to detect default risk.
Investors can no longer hide behind government bailouts, they now have to be paid for taking real default risk.
Commercial banking had risks, too, but they were confined largely to default risk.
In a study last year, the International Monetary Fund concluded that ratings were a reasonably good indicator of sovereign-default risk.
As for default risk, bondholders will experience price declines similar to equities, but there is a big difference with most bonds.
Gary Jenkins of Deutsche Bank points out that, historically, investors have been overpaid for the default risk on high-quality corporate bonds.
For these reasons banks should be encouraged to consider more seriously the liquidity of their loans as well as their default risk.
In the current European crisis, ratings firms had begun to downgrade peripheral euro-zone countries years before bond markets woke up to default risk.
In reality, I believe the notion that the market is overcompensating investors by 6 percentage points for default risk grossly overstates the case.
The convergence in yields reflects mainly the removal of exchange-rate risk since the creation of the single currency, but that still leaves default risk.
However, following the announcement Thursday of a multi-billion dollar settlement over mortgage servicing, CDS widened (showing perceived greater default risk) by 0.14-0.34%, according to CreditSights.
Ratings of AAA -- which denote practially no default risk -- are crucial to the insurers because they effectively transfer their creditworthiness to bond issuers.
That probability gives you a pretty good assessment of default risk.
Just as in the past, high yield bonds trade at an interest rate spread over Treasury bonds, which are more liquid and less subject to default risk.
Investment-grade corporate bonds, which carry only a sliver of default risk, now yield an average 1.8 percentage points more than Treasurys, up from 1.3 points in early 2000.
Importantly, we believe this strategy would require no immediate use of cash other than the ongoing dividend, and would not pose any maturity, re-financing, balance sheet, or default risk.
The yield on high-yield bonds has risen to 9.33%, the highest level since 2002 and a sign of growing default risk, even though defaults remain near a historic low.
In fact, according to CreditSights, credit default swaps (CDS) which measure the risk of default actually tightened (showing the market sees reduced default risk) 15-50 basis points, or from 0.15-0.50%.
To reduce interest-rate and default risk, Ms. Benz suggests sticking with intermediate-term muni-bond funds with a high percentage of their holdings in general-obligation bonds, which are repaid with tax revenue.
Usually when countries or companies see their credit rating lower, they are forced to borrow money at a higher rate because lenders use the lower rating to gauge default risk.
Differences in default risk and tax treatment will mean that individual bond markets remain segmented though to the extent that they are less so than now, the euro may still gain.
Although the investments resembled bonds, paying buyers a fixed interest rate for taking on the default risk of corporate debt, the products invested in synthetic collateralized debt obligations held by Lehman.
In recent weeks there has been a rise in both LIBOR (a gauge of banks' borrowing costs) and the credit-default-swap spreads on bank bonds (the cost of insuring against default risk).
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Anxiety about sovereign-default risk, and the budget-cutting measures to counter it, will further sap the peripheral economies, thus raising the chances of big losses on the loans British banks have made there.
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