Why does the carry of a bond not adjust for defaults?
carryquestionman
Ordinarily, the carry of a bond is computed by keeping 'everything fixed', but moving the bond in time, and then repricing it. However, say there is a certain probability of the bond defaulting. During the carry period, the bond may default with that probability. Therefore, we ought to remove this probability of default (adjusted for loss given default). After all, if you do not do this, you are essentially assuming that something has changed, namely that the default probability has collapsed to