Default rate of investment grade bonds vs high yield bonds
Risk of default in bonds can be easily reduced by only investing into investment grade bonds.
The above chart shows default rate of Investment Grade and High Yield bonds since 1981.
Source: S&P's Global Fixed Income Research.
From the chart, we can see that even during 2008/2009 crisis, default rate for Investment Grade bond is less than 1%.
To further reduce the risk of default, we can do due diligence to invest into bond issuers that are:
- profitable
- generate free cashflow (operating cashflow - capital expenditure)
- not too highly leverage (debt to equity less than 100% for non banks).
The above chart shows default rate of Investment Grade and High Yield bonds since 1981.
Source: S&P's Global Fixed Income Research.
From the chart, we can see that even during 2008/2009 crisis, default rate for Investment Grade bond is less than 1%.
To further reduce the risk of default, we can do due diligence to invest into bond issuers that are:
- profitable
- generate free cashflow (operating cashflow - capital expenditure)
- not too highly leverage (debt to equity less than 100% for non banks).
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