As we see below, the observed primary-market, initial-issue yield premium for speculative-grade bonds relative to Aaa-rated bonds, 366 basis points, lay within the 95 percent confidence interval when both types of correlation were considered; however, if both types of correlation were ignored, it fell outside the 95 percent confidence interval.
Altman (1989, 1991, 1992) suggests speculative-grade bond risk premiums of 300 to 500 basis points over Treasuries, whereas Hickman (1958) found that, from 1900 to 1943, the annual yield spread between speculative-grade bonds and high-grade bonds was approximately 300 basis points.
Given the results displayed in Tables 3a and 3b, we are 95 percent certain that the true population mean annual loss rate is less than 422 basis points using equal-weights or 626 basis points using market-weights for speculative-grade bonds based on the 13 years covered in this study.
0394 Notes: (a)=par value of defaulting speculative-grade bonds (b)=total par value of speculative-grade bond market excluding defaulted issues (c)=traditional frequency measure is aggregate par value of defaulting bonds in year t divided by aggregate par value of outstanding bonds in year t; we normalize [F.
We collected data on speculative-grade bonds back to 1976; however, because of the small size of the market, we elected not to include data prior to 1982.
Market weights are determined by the cumulative par value of all speculative-grade bonds outstanding.
This suggests that speculative-grade bond primary markets efficiently price default risk and that other types of risk are priced as coincident as opposed to orthogonal risks.
Much of the market-related systematic risk found in speculative-grade debt is due to markets reacting to changes in the economy in the same manner that the speculative-grade bond market reacts to changes in the economy.
Holding maturity constant, the option values of investment-grade and speculative-grade bonds are closer.
Assuming the Kalotay, Williams, and Fabozzi model is accurate, the call dates of the speculative-grade bonds are not sufficiently early to offset the effects of their shorter maturities and higher call prices.