These forums have been archived and are now read-only.

The new forums are live and can be found at https://forums.eveonline.com/

Market Discussions

 
  • Topic is locked indefinitely.
 

Bond default rate

Author
Gregory Brunswick
Deep Core Mining Inc.
Caldari State
#1 - 2012-02-07 03:35:31 UTC
for you guys that have had dipped into their fair share of bonds, what is the default rate?
David Forge
GameOn Inc.
#2 - 2012-02-07 04:29:40 UTC
Do bonds often default? Isn't the problem usually scamming?
Bath Sheeba
Another Success Story
#3 - 2012-02-07 04:32:53 UTC
I think the Op meant the regular rate for bonds, not the rate at which they default.
Jacob Stiller
The Scope
Gallente Federation
#4 - 2012-02-07 06:52:34 UTC
David Forge wrote:
Do bonds often default? Isn't the problem usually scamming?


Doesn't scamming count as default?
Tekota
The Freighter Factory
#5 - 2012-02-07 08:24:45 UTC  |  Edited by: Tekota
If by default you're talking of offered interest rates the biggest determiner is whether the loan is collateralised or not. Collateral assuming to be held either by the lender or a third party the lender trusts very highly and of appropriate amount and volatility you can typically see such offerings fill for 3-10%

If uncollateralised then the interest rate is not really the determining factor of bond success. Nevertheless 5-15% is probably about the norm, but offering higher interest rates will not make an unattractive uncollateralised loan look attractive - if it did then all those isk doublers in Jita offering 100% rates would be swamped. Uncollateralised offerings are more dependent upon information, both that presented in your pitch and that existent and known about you already through your actions, your history, customisable API keys, full disclosure of alts, proof of previous operations, proof of skills etc.


If by default you're talking of the "take the money and run" rate, well it's actually going to fairly low - not through lack of trying by any means, but a large number of attempted scams (or what we generally assume to be attempted scams) never really get off the ground and take any real investors' money. Those that fill, with a large proportion of actual people's isk rather than alt posting and then go on to scam is - massive finger in the air guess here - between 1 in 5 and 1 in 20. Note that is not to say that only 1 in 5 to 1 in 20 offerings on this board are likely to be scams. My personal (and in no way really representative of the heavier investors on this board) rate of losing my money is off the top of my head about 1 in 7 - which is pretty damn poor and doesn't make a compelling argument for investing; nevertheless I do believe that compelling arguments can be made and indeed have been made with more impressive figures to back them up.


edit: interest rates noted are generally assumed to be the rate payed monthly and non-compounding.
Gregory Brunswick
Deep Core Mining Inc.
Caldari State
#6 - 2012-02-07 13:26:52 UTC
I meant rate at which bonds default but the information of standard bond rates is nice tp know as well. If the rate of default is up to 1in 5 it would require at least a 25%interest to break even. At 1 in 20 the oddds are better requiring just over 5% to break even. 1 in 7 would require 16 2/3 % interest to break even.

So my question is why is the normal interest rate so low relative to the default rate?
Kara Roideater
#7 - 2012-02-07 13:27:15 UTC
Defaulted bonds to undefaulted bond ran at about 1:9 for the period (c. 12 months) I looked at, if memory serves. But, the ratio of isk lost in scams to isk paid out in interest was completely different as there was a higher proportion of scams amongst the very big offerings. The ratio of individuals who scam to those who don't is, again, different, as many scammers/defaulters run successful bonds first before running.
Kara Roideater
#8 - 2012-02-07 13:30:52 UTC  |  Edited by: Kara Roideater
Gregory Brunswick wrote:
I meant rate at which bonds default but the information of standard bond rates is nice tp know as well. If the rate of default is up to 1in 5 it would require at least a 25%interest to break even. At 1 in 20 the oddds are better requiring just over 5% to break even. 1 in 7 would require 16 2/3 % interest to break even.

So my question is why is the normal interest rate so low relative to the default rate?


Actually, your figures don't quite work. A bond that doesn't scam, and even some bonds that do, may pay out interest for months or even years, so you need to make a calculation in terms of 'bond months' rather than taking bonds as the basic unit for working this out. Example: I invest 1 bil in a bond that runs for 12 months paying 10% a month and another 1bil in a bond that scams in month one. Despite a 50% scam rate I do better than break even on a 10% return.
Gregory Brunswick
Deep Core Mining Inc.
Caldari State
#9 - 2012-02-08 22:29:43 UTC
I came up. Witht those numbers under the assumption that most bonds were 1 month which is what it seems is mostly posted. Calculating that would be a bit more complicated requiring numbers which I don't think anyone has such as average amount of time that a default bond runs before defaulting and what on average is that a fraction of the time that the bond should have ran.
Vaerah Vahrokha
Vahrokh Consulting
#10 - 2012-02-09 08:43:41 UTC  |  Edited by: Vaerah Vahrokha
Gregory Brunswick wrote:
I meant rate at which bonds default but the information of standard bond rates is nice tp know as well. If the rate of default is up to 1in 5 it would require at least a 25 pct interest to break even. At 1 in 20 the oddds are better requiring just over 5 pct to break even. 1 in 7 would require 16 2/3 pct interest to break even.

So my question is why is the normal interest rate so low relative to the default rate?


The question has a wrong premise: that the market for bonds is wrong.

Markets may undershoot or overshoot (price bubbles) but after a time they "align" to the perceived best compromise between scams and successes, demand and offer, risk and reward, greed and fear, cost of opportunity vs ROI, EvEBOR.

We can see the above variables work together and form the bonds market price in a complex, inter-related way.


- Scams vs successes: this is the easiest to figure out and the figures given by RAW23 would seem to be reliable.
Yet, bonds / loans etc. don't match with the current lower interest rates. Why?

- Demand and offer: demand is always high since the cost of money is decreasing over time. This creates a scenario where the average investor has more and more available capital, while the average potential investee has the same or just slightly above need for debt. Inflation plays a role at how much an investee will need but the total need for debt is o(total available investor capital), inflation-resistant NPC prices are requested at some investments (i.e. the cost to purchase BPOs for an IPO). Even pure trader bonds would require about below 12 pct more capital than one year ago. Whereas the 2011 investee would possibly need 2B, the 2012 who heavily trades in Incursions affected items (worst case) would need 2.24B.
Now, 240M of difference are a nothing compared to the tens of billions in the hands of the investors.
This behavior is similar to many commodity markets: there's virtually infinite supply of "free minerals" versus a limited demand and this keeps prices low.

- Risk and reward: there's a current of thought about a wanna be EvE Tychoon has "arrived" when he achieve as much passive ISK earning as possible. EvE investments are a quite low micro-management task. Investors may accept higher risk just because the reward is so passively earned. Furthermore, larger and longer term investments (see Grendell's) are seen as even lower active commitment ones and thus lower interest rates are accepted.

- Greed and fear: greed lowers the perceived feeling of risk, fear rises it (with a perception about 2.5 times stronger than greed if I recall some studies published some years ago). New investors continuously appear on the market (see the "I got 10B how do I invest them?" threads) and they begin with greed as only factor. Fear only appears after they are burned or after reading scam reports again and again. Therefore there's a bias towards greed and a bias against fear ("it won't happen to ME!, I'll be lucky / smart enough").

- cost of opportunity vs ROI: this is related to demand and offer in two ways: it's easier to grind capital and potential scammers also have less incentive to bother with the effort at creating credible investments. A portion of them will just use their smarts to self grind money, seen as less bothersome than preparing a credible investment, possibly having to endure flames and audits, having their character "burned". This creates less careful investors but also filters out the smart scammers, leaving out the dumb, evident ones that MD has always seen around.

- EvEBOR: this is a somewhat fantasy term I created about 1 year ago. I noticed a similarity between the effects of LIBOR on general debt finance and a "something" that happens in EvE.
While there are no bank to bank loans in EvE, there is a "minimum required interest rate".

This minimum interest rate would be the interest asked to an ideally 100 pct reliable investee / loanee.
Imagine this scenario: if Chribba asked you a loan (unlikely Blink), how low would you go before saying him "no, you want to pay back a too low rate"?
This datum is the sum of inflation plus the zero risk minium interest rate. 1 year ago we had no such inflation, I estimated EvEBOR to be equal to about 1.2-1.7 pct. Now it's probably above 2 pct.

Notice how Grendell could start a large bond in April 2011 with the old EvEBOR and could achieve a low 1.75 pct interest rate.
He then started a shorter duration investment after EvE inflation rose up and - coupled with the fact it's shorter term and smaller (see cost of opportunity above) he unsurprisingly offered 4 pct.
Now, I acknowledge that the term might be misleading and not totally aligned with the RL counterpart but EvEBOR conveys the idea and sounds cool Cool.


Edit: had to replace all the percent signs due to terrible forum.
Kara Roideater
#11 - 2012-02-09 09:17:36 UTC
Gregory Brunswick wrote:
I came up. Witht those numbers under the assumption that most bonds were 1 month which is what it seems is mostly posted. Calculating that would be a bit more complicated requiring numbers which I don't think anyone has such as average amount of time that a default bond runs before defaulting and what on average is that a fraction of the time that the bond should have ran.


You're making the mistake of confusing unit quantity of bonds with 'most bonds' as a proportion of the market. Lots of small starter bonds do, indeed, run for just one or two months. But consider this: Grendell has been running a 350bil bond for about 10 months now. That constitutes the same volume of investment over time as 3500 separate 1bil bonds running for a month, or shifting up a level, something like 60 20bil bonds running for three months. So, despite taking up a large amount of visual space on MD you can't think of the bond market in terms of what 'most bonds' do when simply taken in terms of the quantity of bonds. You need to think about the whole market when working out why interest rates are as they are.
Samuel Laplante
Intellectual Wookies
#12 - 2012-02-10 08:46:52 UTC
I think someone wrote an analysis on this a year or two ago, but it was over my head. It boils down to at the time of the report, it was +ev to have invested in bonds, historically. Perhaps it was better info than that, but if it was, I can't remember. It was written at a pretty high level, like university math level I think, which I've never done.