Bond investment decisions must recognize the importance of returns, and return variability, in addition to default risk. Consider an investor who bought all low-grade bonds newly issued in 1977 and 1978 and held them until the end of 1988. The average promised yield on these bonds at issuance in 1977 and 1978 was 11.2 per cent. The investor, however, would have realized a yield of 8.51 per cent.

Default rates for all bonds, regardless of issue date or age, tend to vary together as economic conditions change. When this systematic variation in defaults is controlled for, the statistically significant relation between bond age and default rate is greatly diminished.