Risk Premia
I've got a pretty basic question that I'm hoping someone here can answer.
Why does anybody buy corporate bonds, when government bonds offer almost the same total returns as do corporate bonds?
From Ibbotson's Stock, Bonds, Bills, and Inflation Yearbook 2002, page 31, geometric mean of annual total returns 1926 to 2001...
Large Company Stock = 10.7%
Small Company Stock = 12.5%
Long-Term Corporate Bonds = 5.8%
Long-Term Gov't Bonds = 5.3%
Intermediate-Term Gov't Bonds = 5.3%
US Treasury Bills = 3.8%
By my calculation, and referring to page 85, the arithmetic mean of the default premia since 1971 is 0.06%.
I've got a pretty basic question that I'm hoping someone here can answer.
Why does anybody buy corporate bonds, when government bonds offer almost the same total returns as do corporate bonds?
From Ibbotson's Stock, Bonds, Bills, and Inflation Yearbook 2002, page 31, geometric mean of annual total returns 1926 to 2001...
Large Company Stock = 10.7%
Small Company Stock = 12.5%
Long-Term Corporate Bonds = 5.8%
Long-Term Gov't Bonds = 5.3%
Intermediate-Term Gov't Bonds = 5.3%
US Treasury Bills = 3.8%
By my calculation, and referring to page 85, the arithmetic mean of the default premia since 1971 is 0.06%.
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