Investments, tenth edition

    10.   When bonds are subject to potential default, the stated yield to maturity is the maximum pos-

sible yield to maturity that can be realized by the bondholder. In the event of default, however, 

that promised yield will not be realized. To compensate bond investors for default risk, bonds 

must offer default premiums, that is, promised yields in excess of those offered by default-free 

government securities. If the firm remains healthy, its bonds will provide higher returns than 

government bonds. Otherwise the returns may be lower.