hiriskpaul wrote:No, you have to consider capital losses as well as non-payment of coupons. Default on 1 bond in 100 could potentially mean a 1% loss on the portfolio. Not all defaults will result in a total wipeout of course, but often bondholders will not recover all their capital.
Ok, I was under the impression that the bonds would be held till maturity. I guess you are saying sometimes the fund flogs them at a loss to repurchase others...........ahh! or maybe you are saying that when some bonds mature it might be tricky to replace them with others at a suitable price to maintain yields?
hiriskpaul wrote:Running yields are not a very useful concept by the way. For bonds yield to maturity is better. Running yield on Coop group 11% 2025 is 8.5%, but yield to maturity is only 6%. The yield to maturity is better as it takes into account the 30p per bond capital loss from now to maturity.
Thanks Paul, don't worry, I'm ok with the differences between RY and YTM. But thanks anyway.
Alaric wrote:The risk is to capital value as well as default or partial default, so that a bond with a 6% redemption yield widens out to a 10% yield. How much that writes down the capital value would depend on the outstanding term to maturity.
I don't understand this bit Alaric, I'm afraid.
GeoffF100 wrote:In the very long run, one would not expect the return from high yield (AKA junk) bonds to fall all the way down to those of investment grade bonds. We would expect there to be some residual long term reward for holding these bonds. The reason is that they have an unattractive risk/reward profile. Investment grade bonds are likely to deliver a reliable return come what may, except in the most dire of circumstances. Junk bonds give good returns in the good times, but terrible returns in the bad times, just when you can least afford to take the hit. You cannot predict in advance whether times will be better or worse than the degree of badness that is already priced into the bonds.
Yes, this is good food for thought. What's kind of occurred to me is that, if a junk bond loses (by way of defaults) a sizeable % of the holdings it's obv. got less capital to rebuild itself back up when times improve.