For example, low-grade bonds
are generally considered less liquid than investment-grade bonds; as such, the yields observed in the market for low-grade bonds
will generally reflect a higher illiquidity premium than investment-grade bonds.
High-grade bonds accounted for 58% of the sample and low-grade bonds
Salter suggested a mix of 2% low-grade bonds
, 30% large-cap, 24% mid-cap, 20% small-cap, and 24% international stocks, the latter preferably within a managed fund.
Studies using actuarial approaches, such as Fons (1987) and Altman (1989, 1990, 1991, 1992, 1993), Long (1991), and Mood/s Special Report (1993), focus on the yield to maturity of low-grade bonds
and compare implied default rates with actual default losses.
Researchers have found systematic differences among returns for different months of the year in low-grade bonds
. No fully satisfactory explanation has been provided for this apparent violation of the trading hypothesis.
In the early 1980s, before the recent wave of restructurings, these low-grade bonds
accounted for less than one-tenth of the total outstanding.
She adjusted the asset allocation in Michelle's portfolio to 28% large-cap, 24% mid-cap, 24% international, 19% small-cap, and 5% in low-grade bonds
: "This is the best portfolio mix for someone like Michelle who is looking to invest for at least 18 more years and has a moderately aggressive risk tolerance," says Helm.
I hypothesize that periods in which the volatility and sensitivity (i.e., to the Treasury bond and equity markets) of low-grade munis relative to high-grade munis is due in part to the fact that the low-grade bonds
are hybrid securities.
For example, Smirlock (1984/85) was able to identify the existence of this anomaly in low-grade bonds
. In addition, Schneeweis and Woolridge (1979) presented evidence of the January effect in various bond markets (i.e., government, municipal, corporate, utilities).
Keim, in an update of an earlier analyses, discuss the myths and reality of low-grade bonds
. They conclude that low-grade bonds
display characteristics of both small stocks and high-grade bonds.
Keim, 1991, "The Risk and Return of Low-Grade Bonds
: An Update," Financial Analysts Journal (September/October), 85-89.