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By Alain RUTTIENS, NEURON sarl, Luxembourg
Investors and portfolio managers know that investing in a bond is a priori safer, although generally less rewarding, than investing in an equity. But what if the bond is defaulting before its maturity? This issue is more crucial when investing in bonds with a poorer rating (sub-investment grade), such as high yield (HY) bonds.
Before going to default, a bond price will decline progressively: the cumulated daily changes of prices, or returns, are becoming increasingly negative, with an increasing low probability of occurrence, fortunately, the default risk is a rare event. Researchers have tried to quantify the default risk, based on a probabilistic distribution of returns, but since very negative...
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