There is a convertible bond: it will mature in about half a year; the yield to maturity is about 0%; the premium rate is about 20%; the valuation of the underlying stock is not high;
Is this a good investment opportunity? I don’t know, can only do some reasoning and analysis.
If you think it will not default, you are facing a situation of “no profit with a high probability, and a lot of profit with a small probability”. It is equivalent to a dice with six sides. If you roll 1, 2, 3, 4, and 5, you will not lose or make a profit. If you roll 6, there will be a profit.
Of course, this is just a metaphor. It is also possible that the dice has 12 sides, and only a 12 can be won to win; it may also have only 3 sides, and a 3 can be won to win. In other words, how likely is it that the underlying stock will rise by more than 20% within six months? This cannot be calculated.
Therefore, on the premise that the convertible bond does not default, this is a bit like a game of “opening the blind box for free”.
So, do you want to play this game?
According to the basic economics principle: cost is the maximum benefit forgone (the definition of opportunity cost). The principles of economics are not wrong, but the principles of economics are difficult to use directly in practice.
For example, the convertible bond mentioned above, in theory, we need to compare it with other investment opportunities to know whether it is suitable or not. However, how to compare? Not only can we not know how it will end, we can’t even calculate its “mathematical expectations.”
This is the hardest part of investing in this type of work – you have to make decisions with “incomplete information”.
One last tip: In this world, there are only bonds with default rates infinitely close to zero, and no bonds with default rates equal to zero, including government bonds.
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