Studies using actuarial approaches, such as Fons (1987) and Altman (1989, 1990, 1991, 1992, 1993), Long (1991), and Mood/s Special Report (1993), focus on the yield to maturity of low-grade bonds
and compare implied default rates with actual default losses.
Another example, this study examines the distribution of January small stock and low-grade bond
Returns on small-firm stocks and low-grade bonds
are more highly correlated in January than in the rest of the year.
Risky-debt valuation models that do not incorporate interest-rate risk project that low-grade bonds
will become more sensitive to equity market movements during recessions.
Because low-grade bonds
typically have a junior standing in the issuing firm's capital structure and, more important, because their high returns are particularly vulnerable to a drop in earnings, these bonds have risk and return characteristics similar to those of both common stock and debt.
For example, Smirlock (1984/85) was able to identify the existence of this anomaly in low-grade bonds
Green, 1991, "The Investment Performance of Low-grade Bond
Funds," Journal of Finance (March), 29-48.
Keim, "Realized Returns and Defaults on Low-Grade Bonds
1977-1989," Journal of Finance (March 1991), pp.
The company has a moderate exposure to real estate and medium and low-grade bonds
The company has a modest exposure to common stock, and medium and low-grade bonds
0% for 1997; and -- The company has a conservative investment portfolio, with low exposure to medium and low-grade bonds
The company has a modest exposure to medium and low-grade bonds