If you put your whole bond portfolio into the Vanguard index fund, which is mostly in U.S. governments, you have a fairly low risk of default but a fairly high risk of not achieving a positive real return.
It isn't enough to compare the spread to its average, Mr. Fridson says, because the average doesn't reflect the current level of default risk, the strength of the economy, the yield on government bonds or the availability of credit.
"The proposal to lower down payments is of particular concern given the greater default risk of these loans and the difficulty of setting prices for new products whose risks may not be well understood, " the report said.
In fact, according to CreditSights, credit default swaps (CDS) which measure the risk of default actually tightened (showing the market sees reduced default risk) 15-50 basis points, or from 0.15-0.50%.
Credit derivatives have made it easier to separate the credit risk (the danger of default) of bonds from the interest rate risk.
But given the implication of higher risk of default, it ought to follow that a lower credit rating would also mean a higher interest rate.
Yes, a base rate is set by the European Central Bank, but for the past five years, there has been wide divergence between eurozone borrowing rates, as the markets' measure of the risk of default.
It was unable to raise money on international bond markets due to the massively high interest rates demanded for its bonds a reflection of the high risk of default that investors see in Greece.
That probability gives you a pretty good assessment of default risk.
Investment-grade corporate bonds, which carry only a sliver of default risk, now yield an average 1.8 percentage points more than Treasurys, up from 1.3 points in early 2000.
Although the investments resembled bonds, paying buyers a fixed interest rate for taking on the default risk of corporate debt, the products invested in synthetic collateralized debt obligations held by Lehman.
The necessary steps would also involve full "mutualisation" of eurozone sovereign debt, the pooling of sovereign liabilities, which would permit the European Central Bank to be the lender of last resort to the currency union - and give the eurozone the kind of protection against the risk of default that the UK and the US have.
Regression analysis has provided important evidence: a famous study of mortgage applications by the Federal Reserve Bank of Boston, for instance, showed that loan denial rates for blacks were eight percentage points higher than those for whites, once a large number of factors that affected the risk of default were included.
Although the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians.
Also, if they run low on cash and fail to pay taxes and insurance, they can lose their homes (1 out of 10 borrowers are currently at risk of default for this reason).
No, argues David Moss, an economist at Harvard Business School, in a forthcoming book: the benefits of putting a ceiling on the potential losses faced by shareholders far outweighed the cost of a slightly higher risk of debt default.
In recent weeks there has been a rise in both LIBOR (a gauge of banks' borrowing costs) and the credit-default-swap spreads on bank bonds (the cost of insuring against default risk).
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Accordingly, a private replacement for Social Security would have to take the form of a fully-inflation-indexed annuity with zero risk of default.
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Morris Goldstein of the Institute for International Economics in Washington puts the risk of default before the end of 2003 as high as 70%.
The Budget Control Act was the result of a failure by Congress to agree to a balanced approach to deficit reduction, and it was the result of Republicans willing to play chicken with the full faith and credit of the United States, willing to risk default, some of them even seemed to anticipate with glee the prospect of default.
And that process begins at midnight on August 2nd in terms of no longer being able to borrow, which puts you at risk of default.
Lenders say they need to charge higher rates partly because buyers of manufactured homes often have low incomes, imperfect credit and carry a higher risk of default.
But there is another, stormier possibility: that of renewed market turmoil caused by the risk of sovereign default or a euro-zone break-up.
The yield on high-yield bonds has risen to 9.33%, the highest level since 2002 and a sign of growing default risk, even though defaults remain near a historic low.
Since the last week of September the apparent risk of a Commerzbank default, on the basis of derivative prices, has nearly trebled (see chart).
You may think of Singapore as a relatively safe haven, but KMV says the default risk on the debt of publicly traded companies there has shot up -- from a negligible 0.1% almost two years ago to 4.2% now.
In the long-term, it's the likes of France and the UK that have most to fear from the downgrade of the US. Perhaps the risk of a sovereign default in those two AAA countries is now smaller than for the US. Their parliaments are certainly more reliable.
Spanish banks like Santander and BBVA hold more than 40% of the outstanding sovereign debt of Portugal (valued at about 60 billion euros), which carries an eye-wateringly high interest rate reflective of the risk that the county will default on some of its payments.
The convergence in yields reflects mainly the removal of exchange-rate risk since the creation of the single currency, but that still leaves default risk.
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