Investments, tenth edition

  speculative-

grade  or  junk bonds    .  Defaults on low-grade issues are not uncommon. For example, 

bod61671_ch14_445-486.indd   468

bod61671_ch14_445-486.indd   468

7/17/13   3:51 PM

7/17/13   3:51 PM

Final PDF to printer

---

  C H A P T E R  

1 4

  Bond Prices and Yields

469

almost half of the bonds rated CCC by Standard & Poor’s at issue have defaulted within 

10 years. Highly rated bonds rarely default, but even these bonds are not free of credit risk. 

For example, in 2001 WorldCom sold $11.8 billion of bonds with an investment-grade 

rating. Only a year later, the firm filed for bankruptcy and its bondholders lost more than 

80% of their investment. Certain regulated institutional investors such as insurance compa-

nies have not always been allowed to invest in speculative-grade bonds. 

  Figure 14.8  provides the definitions of each bond rating classification.