Corporate bonds investment-grade

To assess the impact of changing yield spreads therefore, it is necessary to carry out a simulation on the effect of different yield curve assumptions. For instance, we may wish to analyse 1-year holding period returns on a portfolio of investment-grade corporate bonds, under an assumption of widening yield spreads. This might be an analysis of the effect on portfolio returns if the yield spread for triple-B-rated bonds widened by 20 basis points, in conjunction with a varying government bond yield. This requires an assessment of a different number of scenarios, in order to capture this interest-rate uncertainty. 

For lower- and non-rated bonds, the observed effect is the opposite to that of an investment-grade corporate. Over time the probability of default decreases therefore, the theoretical default spread decreases over time. This means that the spread on a long-dated bond will be lower than that of a short-dated bond because if the issuer has not defaulted on the long-dated bond in the first few years of its existence, it will then be viewed as a lower risk credit, although the investor may well continue to earn the same yield spread. 

Corporate bonds fall into two broad credit classifications investment-grade and high-yield (or "junk") bonds. The largest holders of corporate bonds are institutions,- the complexity as well as the fact that corporate bonds are fully taxable at all levels (federal, state, and local) usually makes individual investors shy away. 

To simplify, corporate bonds fall into two broad credit classifications investment-grade and high-yield. 

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