The Investment Performance of Low-Grade Bond Funds
DOI:
https://doi.org/10.1016/1057-0810(91)90039-2Abstract
This study extends the literature on the pricing of low-grade bonds by examin- ing the performance of low-grade bond funds. The findings reveal that over the long run low-grade bond fund returns are approximately equal to the returns provided by an index of high-grade bonds. The relative risks of high and low-grade bonds are more difficult to assess. Because of their shorter durations, low-grade bonds are less sensitive to movements in interest rates than high-grade bonds. On the other hand, low-grade bonds are much more sensitive to changes in stock prices than high-grade bonds. When adjusted for risk using a simple two-factor model, the returns on low- grade bond funds are not statistically different from the returns on high-grade bonds. The Journal ofFinance, Vol. XLVI, No. 1 (March 1991), pp. 28-48. (Reprinted with permission of The Journal of Finance.)
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