ABSTRACT This study develops an alternative way to measure default risk and suggests an appropriate method to assess the performance of fixed‐income investors over the entire spectrum of credit‐quality classes. The approach seeks to measure the expected mortality of bonds and the consequent loss rates in a manner similar to the way actuaries assess mortality of human beings. The results show that all bond ratings outperform riskless Treasuries over a ten‐year horizon and that, despite relatively high mortality rates, B‐rated and CCC‐rated securities outperform all other rating categories for the first four years after issuance, with BB‐rated securities outperforming all others thereafter.

ABSTRACT In this paper, empirical evidence with respect to both the direct and indirect costs of bankruptcy is assessed. This should be of interest for three related reasons. First, there is a need to provide further evidence as to the size of bankruptcy costs. Second, for the first time a proxy methodology for measuring indirect costs of bankruptcy is presented and actually measured. Third, a simple format for measuring the present value of expected bankruptcy costs is compared with the present value of expected tax benefits from interest payments on leverage. This comparison has important implications for the continuing debate as to whether or not an optimum capital structure exists for corporations.

Edward I. Altman, The Behavior of Firms in Financial Distress: Discussion, The Journal of Finance, Vol. 38, No. 2, Papers and Proceedings Forty-First Annual Meeting American Finance Association New York, N.Y. December 28-30, 1982 (May, 1983), pp. 517-522