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Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls

Authors

  • PAUL ASQUITH,

  • DAVID W. MULLINS JR.,

  • ERIC D. WOLFF

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    • Asquith is at the Massachusetts Institute of Technology. Mullins is on leave from the Harvard Business School at the U.S. Department of the Treasury. This research was performed while Mullins was on the faculty of the Harvard Business School and represents his personal views and not those of the U.S. Department of the Treasury. Wolff is at the U.S. Department of Justice. This research was performed while Wolff was at the Harvard Business School and represents his personal views and not those of the U.S. Department of Justice. We wish to acknowledge the assistance of First Boston, Drexel Burnham Lambert, Morgan Stanley, and Salomon Brothers for making default data available. Thanks are also due to the Division of Research, Harvard Business School for providing financial support. In addition, we wish to thank Ben Bisconti and Darquise Cloutier for their assistance with data collection and Paul Bonner for his computer analysis. We also wish to thank Steve Buser, Greg Hradsky, Michael Jensen, Tim Luehrman, Bob Merton, René Stulz, and the referee for this journal, as well as the participants at the University of Chicago and Harvard University Finance Seminars, for their comments. Finally, special thanks are due to Bruce MacLennan for his research assistance.


ABSTRACT

This paper presents an aging analysis of 741 high yield bonds and finds default, exchange, and call percentages substantially higher than reported in earlier studies. By December 31, 1988, cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979–1983 and from 3 to 9 percent for issue years 1984–1986. Exchanges are also a significant factor although they often are followed by default. Moreover, a significant percentage of high yield debt, 26–47 percent for 1977–1982, has been called. By December 31, 1988, approximately one third of the bonds issued in 1977–1982 has defaulted or been exchanged, and an additional one third had been called. On average, only 28 percent of these issues are still outstanding. There is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982.

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