Bridge over ocean
1 September 1995 Financial Analysts Journal Volume 51, Issue 5

A Yield Premium Model For The High-Yield Debt Market

  1. Edward I. Altman
  2. Joseph C. Bencivenga

A simple method for determining whether the high-yield debt market is “rich” or “poor” at any point in time uses the concept of break-even yield to measure the current market premium that investors can expect to receive over the yield of the benchmark—default-risk-free bonds. Covering the sample period 1988 to 1994, analysis of premiums and implied default rates for each of the high-yield bond rating categories, as well as the overall high-yield market, indicates that premiums over the break-even yield have varied dramatically during the past six years, from 0.5 percent to 8.0 percent. Also, total returns are significantly positively correlated with lagged premiums. This result implies an effective model for predicting returns over 6- and 12-month horizons.

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