A few days ago
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# You have \$1000 to invest, and your financial analyst reccomends two types of junk bonds.?

A bonds have a 6% annual yield with a default rate of 1%. B bonds have a 8% annual yield with a default rate of 5%.(If the bond defaults the 1000 dollars is lost). Which is the best out of the two bonds? Why? Should you even select either bond? Why or why not?

A few days ago
SteveK

From a purely statistical stand point, you should select bond A because it has a higher expected value, but in reality, you would need to consider other real life factors such as risk tolerance, horizon, etc.

Bond A

EV = (0.99) * (1.06 * 1,000) + (0.01) * (-1,000) = 1,039.40

Bond B

EV = (0.95) * (1.08 * 1,000) + (0.05) * (-1,000) = 976

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A few days ago
Level 7 is Best
No right answer. More risk = more potential return. Typically, the younger you are the more risk tolerant you are.

So if you’re under 25, take the high yield (high risk). If you’re over 70, stay way from junk.

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A few days ago