Articlebronze2001

Explaining the Rate Spread on Corporate Bonds

Martin J. Gruber · Deepak Agrawal · Christopher Mann

1,580 citations0/0 files storedThe Journal of Finance

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Credit Risk and Financial Regulations Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

ABSTRACT The purpose of this article is to explain the spread between rates on corporate and government bonds. We show that expected default accounts for a surprisingly small fraction of the premium in corporate rates over treasuries. While state taxes explain a substantial portion of the difference, the remaining portion of the spread is closely related to the factors that we commonly accept as explaining risk premiums for common stocks. Both our time series and cross‐sectional tests support the existence of a risk premium on corporate bonds.

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References

1993Common risk factors in the returns on stocks and bonds 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1985A Theory of the Term Structure of Interest Rates 1987Parsimonious Modeling of Yield Curves 1999Modeling Term Structures of Defaultable Bonds 1995A Simple Approach to Valuing Risky Fixed and Floating Rate Debt 1997A Markov Model for the Term Structure of Credit Risk Spreads

Cited by

2003Equity Volatility and Corporate Bond Yields 2007Corporate Yield Spreads and Bond Liquidity 2012How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?2004Structural Models of Corporate Bond Pricing: An Empirical Analysis 2011Corporate bond liquidity before and after the onset of the subprime crisis 2008Measuring Abnormal Bond Performance 2006An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps 2022

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