I think FrankArabia’s point is more from the risk side vs the return side. If you are comfortable that the equity will perform well, then the company ought to be able to make its bond payments without a problem, thus the risk for bonds that are held to maturity is low if you are happy with the equity. Of course, FIAnalyst points out that just because the bond is not going to go into default doesn’t mean that it’s a bargain. If it’s trading at a premium, you’ll have a capital loss as it matures (hopefully made up by interest and reinvestment income). There may also be embedded options that change the valuation. Or for whatever reason, it might just be overpopular (possibly because the equity looks so good). So the stock can be a buy, but the bond is overpriced/not-yielding-enough-relative-to-the-rest-of-the-market, so the bond is a sell. Good point… I hadn’t thought of that, and it makes capital structure arbitrage easier to understand.
What if a stock is going to perform well because of increased use of leverage? Say, a potential lbo candidate. Stock could rip on an lbo, while debt would trade down.
FIAnalyst Wrote: ------------------------------------------------------- > My point was valuations are not the same across > the capital structure. Thinking a stock is a good > buy and thinking a bond is are two independent > decisions. > > Your posts make it clear you don’t work in either > debt or equity investing. what difference does it make whether I work or don’t work in said field? are you kidding me with your little comment there? are you trying to say you know more than me or soemthing? lol. dude, focus on your returns. your post make it clear you dont’ actually generate returns no matter where you work, otherwise you won’t have to try to “one up” on somebody over a trivial forum posting. i’m done with you.
LOL. Have fun.