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No. of Recommendations: 11
tj:
A bond does not have a high probability of default simply because it has a yield greater than 6% and it may be a much safer bond than one trading with a 5% yield.


I think you and Yoda are talking past each other. I think both of you are correct.

The market is pricing the bond with a 6% yield as a higher chance of default than the 5% bond. Clearly, sometimes this risk is estimated incorrectly. What you are saying is that you think you have knowledge that indicates that this is risk is false.

Smaller companies do fail, in aggregate, more than large companies (they also grow faster). If you have knowledge about underlying assets or earnings power that others do not know you can make money.

I think that Yoda is pointing out that there is risk associated with this. It is easy to get hubris in this business. Things work until they do not.

Charles
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