GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 12

[DanS]

Risk Premia

I've got a pretty basic question that I'm hoping someone here can answer.

Why does anybody buy corporate bonds, when government bonds offer almost the same total returns as do corporate bonds?

From Ibbotson's Stock, Bonds, Bills, and Inflation Yearbook 2002, page 31, geometric mean of annual total returns 1926 to 2001...

Large Company Stock = 10.7%
Small Company Stock = 12.5%
Long-Term Corporate Bonds = 5.8%
Long-Term Gov't Bonds = 5.3%
Intermediate-Term Gov't Bonds = 5.3%
US Treasury Bills = 3.8%

By my calculation, and referring to page 85, the arithmetic mean of the default premia since 1971 is 0.06%.

[TCO]

Originally posted by HershOstropoler
It's "mountain navy", you lithuanian saltwater licker.

After the SudTirol, go get that Adriatic port back.

[TCO]

Re: Risk Premia

Originally posted by DanS
I've got a pretty basic question that I'm hoping someone here can answer.

Why does anybody buy corporate bonds, when government bonds offer almost the same total returns as do corporate bonds?

From Ibbotson's Stock, Bonds, Bills, and Inflation Yearbook 2002, page 31, geometric mean of annual total returns 1926 to 2001...

Large Company Stock = 10.7%
Small Company Stock = 12.5%
Long-Term Corporate Bonds = 5.8%
Long-Term Gov't Bonds = 5.3%
Intermediate-Term Gov't Bonds = 5.3%
US Treasury Bills = 3.8%

By my calculation, and referring to page 85, the arithmetic mean of the default premia since 1971 is 0.06%.

I'm not following your math. The table you cited shows 5.8-5.3 = 0.5% If you have some other table that gives you 0.06% as the delta, why show this table?

[DanS]

Different time periods. The default premium was the highest during the depression. '33 being 10.46%. Oddly, the second highest between '26 and '01 is '01 at 6.7%.

But the '90s through '01 has a negative default premium (on average).

[DanS]

Let's see if this scan will attach OK as a PDF. See pages 85-86.

[TCO]

Originally posted by DanS
Different time periods. The default premium was the highest during the depression. '33 being 10.46%. Oddly, the second highest between '26 and '01 is '01 at 6.7%.

But the '90s through '01 has a negative default premium (on average).

Ok...but you shouldn't juxtapose the two than. I will look at your other post with numbers.

Also, realize that you can't treat corp bonds as a monolithic block. There are a distribution of risks. And that distribution may change over time.

Also, are you sure that the length to maturity is the same?

[TCO]

2 more points:

1. Maybe the long term government bonds contain non-US bonds (i.e. risky countries).

2. I think (not sure but my gut feels this) that the arithmetic mean is the one to use for comparisons not the geometric.

[Adam Smith]

Gp, DanS:

Re our conversation at lunch (which was great), Amazon stock price is up 104% this year, Dan's missing laptop not withstanding.

[TCO]

I was thinking about our conversation at lunch also. As a citizen, am a little dissapointed that the measure of success is how many conferences you go to, but if so, have you thought about using some econometric tricks to estimate 911 impact on passenger rail or busses?

[Adam Smith]

That's an idea for when I want a free trip.

Long term I am thinking of using my knowledge of coal transportation to work my way into electricity / energy, which seems to have better long-term consulting prospects. We didnt have time to get into this yesterday.

[DrSpike]

Yes energy markets are hot (sorry ), I am considering this area myself for when I leave academia. The BOE are keen though........informally they have made a nice offer.......at present they are my top choice.

[TCO]

I' have an interest in coal gassification.

[DanS]

ef: New WAGs from Census showing 1.1% pop growth rate July '01 to July '02...

http://eire.census.gov/popest/data/states/tables/ST-2002EST-02.php

[Adam Smith]

GP:

What level do natural gas prices need to hit to make coal gassification profitable?

[TCO]

Originally posted by Adam Smith
GP:

What level do natural gas prices need to hit to make coal gassification profitable?

I can't remember. I did some work, and had a decent model for looking at natural gas, different kinds of coal and combined cycle plants and the likea nd determining the best NPV plant based on various inputs...a couple years ago. Seem to remember that in spring 2001, the prices were high enough to make coal gassification interesting. (and that futures market made it look like prices would stay up...but futures market was wrong.)

The economics look pretty interesting if you look at a nominal coal gassification plant...but it is acutally pretty hard to get the kind of uptime and startup time needed to be competetive. They are tricky plants.

Also, economics look better with government subsidies for "clean coal." But still kind of interesting that some people (including in government) react negatively to coal gassification just cuase it is coal. (they don't realize how clean it is.)

I think it is an interesting technology. Still not completely competetive...and still sorta trendy...but much closer than solar or wind or fuel cells or the lke. There are some multi100MW plants.