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The Investment Performance of Low-grade Bond Funds




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    • Cornell is Professor of Finance, Anderson Graduate School of Management, University of California at Los Angeles. Green is Vice President, Economic Analysis Corporation, Los Angeles. The authors would like to thank the Investment Company Institute for making the data available. Paul Asquith, Michael Brennan, Jacob Dreyer, Roy Kenney, Tim Opler, Richard Roll, the editor, and an anonymous referee made helpful comments on earlier versions of the paper.


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.

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