Is it possible to lose money with this? Can the bonds default? Is there any guarantee?

Yes. If the option bot makes a loss, the bonds' capital covers it. If the option bot makes a gain but it is less than what the bonds are due in interest, the bonds' capital covers the difference.

Some (fictional) examples to understand things better:

A. Bot makes a 100 BTC loss on 500 BTC of capital at 5%. Bonds are paid 25 BTC in interest. 125 BTC loss is distributed to 500 BTC of capital, resulting in a 0.25 loss per BTC. This means that if someone had 100 BTC in a bond they will now have 75 left.

B. Bot makes a 10 BTC gain on 500 BTC of capital at 5%. Bonds are paid 25 BTC in interest. 15 BTC loss is distributed to 500 BTC of capital, resulting in a 0.03 loss per BTC. This means that if someone had 100 BTC in a bond they will now have 97 left.

On the page you provided I saw a big red line with a 4000% loss... what's that about? Shouldn't that have wiped everyone out?

That wasn't a percentile loss but an absolute figure loss. The results for

August 2012 (pirate month) were: gross receipts 10,110.90263456 BTC; expenditure 14,651.32416421 BTC (of which 466.66966642 BTC interest owed on 9,333.58 BTC capital at 4.9999%.

Thus the net was -4,540.42152965 BTC, resulting in a loss per BTC of 0.48646087. (~48%).

Let's say I wanted to participate and I asked for 5% monthly interest. If everyone else asked for 10%, do I get the 10% rate or do you pay out each person what they asked for?

You get the same interest as everyone else, equal to the highest interest asked for an accepted bond. Some examples to illustrate this. Suppose the bonds are as follows: A 100 BTC at 1%; B 100 BTC at 2%; C 100 BTC at 3%; D 100 BTC at 4%; E 100 BTC at 5%.

If the capital needed is 185 BTC, then A gets 2% on his 100 BTC = 2 BTC interest, and B gets 2% on 85 of his 100 BTC = 1.7 BTC interest.

If the capital needed is 435 BTC, then A, B, C and D each get 5% on their 100 BTC = 5 BTC interest for each. E gets 5% on 35 of his 100 BTC = 1.75 BTC interest.

If the capital need is 600 BTC then A, B, C, D and E each get 5% on their 100 BTC = 5 BTC each, and MP (creditor of last resort) contributes the remainder (600 - 500 total = 100) at the same interest (5%). (There is an exception in that if the previous month interest was higher than 5%, in which case everyone gets that last month's interest.)

Could I be guaranteed a position by just asking for 0% and then take the market rate (whatever the auction comes out to)?

Yes.

If my funds are not accepted in the auction, when are they sent back to me? What are the timeframes like?

Funds are never sent back to you unless you ask for them. If your funds are not accepted in the auction they just sit there and wait the next month. This works as insurance for you, because if the funds aren't accepted

*this also means they aren't at risk*. Revisiting the examples above, in the case where capital needs were 185, if the bot actually made a loss then C, D and E would still have their 100 capital untouched, wheras A and B will have paid whatever shortfall from their capital.

This is how the incentives for bond holders balance: on one hand, they have an incentive to ask for as little interest as possible, to make sure they make it into the auction. On the other hand, they have an incentive to not ask for less interest than the fair market value of the risk they undertake is. Because of this, bondholders are actually required to price risk, and because of this market effort the calculated MPBOR is a valuable signal for the entire lending market.

Do I need to be an MPEx member to participate (i.e. the 30 BTC fee)?

No.

Also, thanks to all others who have answered. The answers offered were correct and helpful, but I wanted to make a full pass through the OPs post to have the record clear. Most of this stuff was stated long ago in the article which introduced the entire thing, back in

February 2012, and which is to this day the chief reference point for pretty much everything to do with MPOE/MPEx.