[DesertCat]

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As part of my retirement portfolio, an advisor has suggested I purchase a "high yield" bond in a company that has some chance of going under during the 3 year term of the bond. Obviously he feels it is unlikely that it WILL fail, but admits there is perhaps a 10% chance the company will fail. The bond is yielding approximately 10%.

How do I calculate EV here, and how can I best understand the risks involved in terms of mathmatics?

Any help would be greatly appreciated.

bill c

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Your best EV may be to fire the advisor. If he's putting you into a risky investment that you don't seem to understand, that's a big -EV right there. It makes me wonder how much he is charging you, and how fair that is, and how safe the rest of your investments are.

If this is your retirement fund, and you are not a skilled investor, I can't see putting even a tiny portion of your portfolio into this bond. What's the benefit? The greater yield is miniscule if it's a tiny investment, and the risk is too high if it's a significant investment.

You can get a risk free yield of 4% or so right now from the federal government. Which means 100% of the time you get 4%. Your bond pays 10% 90% of the time, and if you believe your advisor, -100% the remainder. EV by that calculation is -1%, or about 5% less than a risk free deal.

Of course I'm simplfiying. you are getting 10% for a three year term, you probably have to take much less than 4% on a three year treasury (don't know, I'm equities only right now). And as the other poster said, if the company fails you still have a chance of getting some or all of your money back.

But you can't understand your risks in terms of raw mathematics. You need to review the companies SEC filings in detail to understand the amounts and nature of the assets that you are counting on to repay your bond. You need to understand your bonds position, i.e. is it getting paid first, or is it subordinate to a bunch of other bonds that get paid before it. This is very tricky stuff, which is why I am so dismissive of your advisor.

A key rule of gambling and investing is to stick to what you understand. When your advisor puts you in things you don't understand, then you will never be able to truly estimate your risks.