>My reasoning is if these odds are all correct, over a long period of time,
bonds like this will return their holders 44% on their investment (over and
above a normal treasury return) over a two year period during which they'll
also default. If the value went to zero, it'd be nuts to buy a bond with those
expectations: you'd lose 56% on your investment. But if after the default the
value of the bond fell to 56%, it would make perfect sense.
I'm not sure I understand where you get 56% and 44%. But, for example, if you had a 20-year bond with 15 interest payments left at 10%, then at 56% of face value the return is about 19%, which is what, almost triple what you'd get with a 20 year treasury. If you bought it at issue, your return would be roughly 18.4%, again a lot more than 44% above treasuries. If the market is pricing in a 20% risk premium on a CCC rated bond at 12%, then at issue it will yield 15.2%, roughly.
But I'm sure I'm mistaking your post. What am I missing?
Christian