The Myths and Reality of Low-Grade Bonds
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This paper updates through June 1991 the authors’ prior research on low-grade bonds. The paper finds further support for the hypothesis that low-grade bonds behave sometimes like high-grade bonds and sometimes like small stocks. Much of the drop in the prices of low-grade bonds in the last half of 1990 and the subsequent increase in the first half of 1991 parallel the price movements of small stocks. Also consistent with our earlier work, the volatility of low-grade bonds is less than that of high-grade corporates or long-term governments. The shorter “duration” of low-grade bonds accounts for this counter-intuitive result.
KeywordsStock Index Government Bond Asset Class Bond Index Monthly Return
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