1. Do high yield (“junk”) bond returns beat typical corporate bond returns?
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2. Are high yield bond returns’ variances greater than that of corporate bonds in general?
To answer these questions accurately, we use the methods of the natural sciences, namely we take the following steps:
1. State the hypothesis
2. Identify the appropriate test statistic and its probability distribution
3. Specify the significance level
4. State the decision rule
5. Collect the data and calculate the test statistic
6. Make the statistical decision
7. Make the economic or investment decision
Using the seven steps, The assignment is to compare high yield (a.k.a. junk bonds) and other corporate bonds. You need to use two data series, one for junk bonds and one for higher grade bonds. You could use total return indexes on the FRED website. There are many of them so select two series that will answer the question. Using the data, set up and conduct the experiments and report your results. Make sure to describe how you did each of the seven steps.