Speculative-grade bond


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Related to Speculative-grade bond: Investment grade bond

Speculative-grade bond

Bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond.

High-Yield Bond

A bond with a low rating. Bonds rated less than Baa3 by Moody's or BBB- by S&P or Fitch are considered high-yield bonds. They have higher yields because they have a higher risk of default on the part of the issuer. High-yield bonds are considered sufficiently high-risk that the law does not allow banks to invest in them. They are also called low-grade bonds, and, informally, junk bonds.
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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.
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.
The efficiency and continued viability of speculative-grade bond markets is of considerable importance to future economic growth since 95 percent of all corporations in this country with sales over $35 million do not qualify for investment-grade debt.
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.
Our bond sample is smaller when compared with the entire speculative-grade bond market.
Primary-market, or original-issue risk premiums, and secondary-market risk premiums on speculative-grade bonds are traditionally measured as the difference between yields and/or coupon rates on speculative-grade debt and those on similar maturity Aaa corporate or U.
In addition, many new offerings of speculative-grade bonds have been convertible into equity or have included equity-like features, such as warrants.
Call options on corporate bonds are now mostly observed on speculative-grade bonds and on long-term investment-grade bonds (e.
In our sample, speculative-grade bonds are almost exclusively 7 to 12 years in maturity, most are callable, and none has a maturity over 20 years.
Among callable speculative-grade bonds, 93% have a first call date three or five years after issuance.
Given the typical maturities and call dates of riskier bonds, call option values on speculative-grade bonds are unlikely to surpass those of high-grade bonds unless the lower-tier issuers set sharply lower call prices.
The differences between investment-grade and speculative-grade bonds are even more striking when the data are disaggregated by maturity.