Abstract
This paper attempts to explain the yield spreads charged to new corporate debt issues by comparing the initial yields of a set of 3,287 securities issued over eleven years in the US. We use the measure of constant maturity Treasury rates on the day of issue against the Moody’s Aaa Corporate Bond index for the week prior to the issue, and the yield on a daily index of long-term Treasury securities on the issue date. The influences of credit ratings and disagreement between rating agencies as reflected in split ratings and the interactions between these characteristics are measured. The contributions of sinking fund provisions, call or refunding status, overseas issue and contractual security arrangements are evaluated separately. The results support the view that the higher yields are observed when ratings of agencies differ and that factors associated with the issues also are significant drivers of the yield difference.
Highlights
The influences of credit ratings and disagreement between rating agencies and the interactions between these characteristics are issues that are addressed in this paper
For the sample of 3,285 new corporate debt securities issued between January 3, 1983 and June 30, 1993, with known maturity dates and yields which could be matched by term to maturity with a constant maturity Treasury rate on the date of issue
Year is the year of issue; N is the number of observations in that year; Yield is the measured yield-atissue of the new security, in percent; CMYLD is the constant maturity Treasury rate for the same term as the new issue on the issuing date; yield off-Treasury (YOT) is (Yield - CMYLD); CMQSYLD is the average yield on Moody’s Aaa Corporate Bond Index for the issue date minus CMYLD; GROSS is the total size of the security issue in millions of dollars
Summary
The influences of credit ratings and disagreement between rating agencies and the interactions between these characteristics are issues that are addressed in this paper. BLMT measure the yield off-Treasury (YOT) for new securities, defined as issuing yield less Moody’s index of long-term government bonds on the issue date To explain this spread measure, they used the average daily interest rate (level) on Moody’s long-term Treasury bond index, an absolute deviation measure of volatility in interest rates for the ten days prior to the issue date, a quality spread of the average yield on long-term corporate bonds over the Treasury index rate on the issue date, the natural log of the issue size, the term to maturity of the issue, and the minimum number of years until first call.
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