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The Investment Performance of Low-Grade Bond Funds

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  • Cornell, Bradford
  • Green, Kevin

Abstract

This study extends the literature on the pricing of low-grade bonds by examining 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. Copyright 1991 by American Finance Association.

Suggested Citation

  • Cornell, Bradford & Green, Kevin, 1991. "The Investment Performance of Low-Grade Bond Funds," Journal of Finance, American Finance Association, vol. 46(1), pages 29-48, March.
    • Handle: RePEc:bla:jfinan:v:46:y:1991:i:1:p:29-48
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