The Default Premium and Corporate Bond Experience

  • Author(s): JEROME S. FONS
  • Published: Apr 30, 2012
  • Pages: 81-97
  • DOI: 10.1111/j.1540-6261.1987.tb02551.x

ABSTRACT

The development of organized markets for speculative‐grade corporate debt has provided financial researchers with an opportunity to examine the pricing of default risk. By incorporating previous work on the default experience of low‐rated corporate debt, this paper presents an introduction to risk‐neutral models of risky‐bond pricing and uses these to examine the relationship between the default premium embodied in bond yields and actual default rates. The contribution of macroeconomic information to the default premium is also examined. The author finds that holders of low‐grade bonds have, on average, been compensated for losses due to default.

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