The Investment Performance of Defaulted Bonds For 1994 and 1987-1994

Abstract

This report presents a discussion of the investment performance of those bond issues that have defaulted and continue trading in the public market while the issuing firm attempts a financial reorganization. Monthly total returns measures are compiled based on the Altman-NYU Salomon Center of Defaulted Debt Securities and compared with the total returns of common stocks and high yield bonds. Returns based on our market weighted index are presented for the past year, 1994, as well as the eight year period 1987-1994. While 1994 was at best a modest year of performance for defaulted bonds, these securities performed very well compared to our two other risky indexes and to risk free government bonds. The superior return performance of defaulted bonds is also manifest for the eight year sample period. The volatility of this portfolio is greater than that of our comparable indexes. Diversification ad seasonal movements are also analyzed in this report. Finally, future supply and demand estimates for the defaulted and distressed market are discussed.