The Hypothetical Return Illustrator, below allows you to calculate the hypothetical returns up to a 10-year period for both Investment Grade Corporate Bonds and Treasuries by adjusting the values for the default rate, loss given default, yield to maturity and the number of years invested.
The Case for Value
Step 1. Check the Facts on Investment Grade Bonds
Currently, spreads over U.S. Treasuries are 2.73%, above historical averages, with yields of 5.56%.*
The average market price of an investment grade bond has reached nearly $102.23.*
The 25-year average investment grade default rate is .068%.
The highest Depression-era default rate was 1.56% in 1938.
* As of July 31, 2009.
Step 3. Make Your Own Assumptions
Use the "Default Rate Illustrator" on the top left to illustrate potential default rates.
Today's investment grade bond investor is seeking an approximate 100 basis point risk premium — or return after default — over U.S. Treasuries.
If the bonds outstanding eventually default, investors could be left with only 35 cents of return, a default loss of 65% (a pessimistic assumption based on current market conditions).
