Defaults & Returns on High Yield Bonds: Analysis Through 2001

Journal of Applied Finance, Vol. 12, No. 1, Spring/Summer

Posted: 7 May 2002

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Pablo Arman

New York University (NYU) - Salomon Center

Abstract

The year 2001 was remarkable on many fronts. For the high yield market, it was a year of crushing record numbers of defaults and distressed exchanges, combined with predictable low recovery rates. Despite these fundamental problems and the "flight to quality" following the terrorist attacks in September, the high yield market displayed impressive resiliency.This report documents and comments upon the high yield bond market's risk and return performance by presenting traditional and mortality rate statistics and providing performance data over the market's history. Our analysis covers the period 1971-2001. In addition, we present our forecast of expected defaults.

Two new innovations to our analysis of the high yield bond market are also introduced. We adjust our traditional measure of default loss rates by factoring in the impact of fallen angel defaults where the "investment" in these issues is typically much below par value. Finally, we summarize some recently completed work, on analyzing default recovery rates, with an econometric model that has explained over 90% of the variation in recoveries over the last two decades.

JEL Classification: G15, G21, G28

Suggested Citation

Altman, Edward I. and Arman, Pablo, Defaults & Returns on High Yield Bonds: Analysis Through 2001. Journal of Applied Finance, Vol. 12, No. 1, Spring/Summer, Available at SSRN: https://ssrn.com/abstract=306752

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Pablo Arman

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States

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