Cable & Wireless bond currently at 8.43

HenrikJonsson

ECW1 (Cable 8.75 06 Aug 2012) - cable & wireless bond which currently has a gross redemption yield at 8.43, matures in 2012. Any opinions if this is a good place to stash £4000 through my mini ISA? I am new to investments, so any heads up on why this bond yields quite a bit more than the rest is much appreciated!

meester

I guess it is because there is some credit default risk with this company. They have been classed as junk bonds in the past, not sure if they still are.

I have no idea what the expected default rate of a company like this is. But it seems somewhat unlikely to me.

I would want to understand quite a bit more about bond default rates before investing much. I believe banks can calculate default risks, and the price of this bond should be above the average return when taking into account defaults: the risk premium. What the level of risk premium is on a low-rated bond is something I don't know. I guess if the risk premium is significant, it would be worthwhile.

I think the returrn would reflect something like:

98 times the bond returns 108.43
2 times the bond defaults, you get nothing

Total yield based on these arbitrary numbers is then 6.26%

Note that even though the default risk is only 2%, it really damages the actual average yield.

If the yield on gilts were 5.25%, that is the risk-free return, then the effective risk premium is about 1%.

It doesn't look so attractive then.