It was unable to raise money on international bond markets due to the massively high interest rates demanded for its bonds a reflection of the high risk of default that investors see in Greece.
If you put your whole bond portfolio into the Vanguard index fund, which is mostly in U.S. governments, you have a fairly low risk of default but a fairly high risk of not achieving a positive real return.
Layering of risk means the borrowers courted by these lenders had multiple characteristics that would put them at high risk for default, including no down payment, no documentation of income or assets, low credit scores and second mortgage in lieu of a down payment.
Gary Jenkins of Deutsche Bank points out that, historically, investors have been overpaid for the default risk on high-quality corporate bonds.
We believe that during economic expansion, the default risk associated with high-yield corporate bonds lowers.
As default risk is the primary driver of high-yield corporate bond prices, as opposed to interest rate direction, when the economy expands, the risk of high-yield corporate bonds defaulting is reduced and this is reflected in lower volatility.
Spanish banks like Santander and BBVA hold more than 40% of the outstanding sovereign debt of Portugal (valued at about 60 billion euros), which carries an eye-wateringly high interest rate reflective of the risk that the county will default on some of its payments.
Morris Goldstein of the Institute for International Economics in Washington puts the risk of default before the end of 2003 as high as 70%.
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.
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.
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