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Thanks. If I bought these bonds and they actually paid back, if get a 75% return? So, how is risk calculated...quantitatively or more gut?

• wladimir 15y ago
  Yes. It's kind of a "double-or-nothing" casino game. The yield is determined by the free market, it's the amount that Greece has to (promise to) pay for anyone to take them. It's not determined by a formula afaik, just based on current events and the state of the country's finances. I don't think you can invest (or rather, speculate, this is too crazy to call investing) in these as normal retail investor though.
  • illumin8 15y ago
    To be clear, the yield is determined by the free market as the price they pay for the bond. If the bond was originally priced at $100, with a 1% coupon payment (the amount the government or bond issuer will pay you in interest), if the resale value goes down to $50 in the open market, then the yield has doubled to 2%, since a new owner of the bond only had to pay $50 to get the same $1 coupon payment while holding the bond.
    • fr0sty 15y ago
      Regardless of whether the bond has a coupon payment or not the face value of the bond is due at maturity. In your example the $1 coupon is still paid but in two years you also get $100 back on your $50 purchase (netting 20+%apy). Of course if the government defaults on your bond you get maybe on $1 coupon and end with a net loss of $49.
      • illumin8 15y ago
        Ah yes, you're correct. So my yield is way off. Thanks for the correction.
• goodside 15y ago
  Remember that rates are always given as annual rates. If you buy $100 in two-year bonds, in two years you get about $303 back, or ($100 * 1.74^2).