Ten Questions About High-Yield Bonds

Riepe, Mark W.
December 1998
Journal of Financial Planning;Dec1998, Vol. 11 Issue 6, p54
Academic Journal
This article provides information on the high-yield bonds, a negotiable instrument rated below investment grade by one of the major bond rating agencies. Using Moody's ratings, high-yield bonds are those rated below Baa3; using Standard & Poor's ratings, they are those bonds rated below BBB-. Many bonds are unrated. Those that are unrated, but trade at yields consistent with rated junk bonds, are also included in the high-yield universe. Depending on the series used, high-yield bonds can appear to have had less volatility than Treasuries. For example, from 1986 to 1997, the annualized monthly standard deviation of CS First Boston's High-Yield Index was 7.3 percent compared with 10.7 percent for the Ibbotson Associates Long-Term Government Bond Index. On the other hand, the estimate of the standard deviation of returns for junk bonds is the historical standard deviation of annual returns since 1970. Using data through 1997, this approach results in an estimated standard deviation of 12.4 percent. Annual returns are used, because the lower liquidity of the junk bond market can lead to stale prices, which makes it appear that high-yield bonds are less volatile than they actually are when their historical returns are examined.


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