Quantifying Risk in the Corporate Bond Markets

Under certain circumstances, yield spread volatility and total return volatility on corporate bonds are directly related. Consequently, risk in the corporate bond market can be measured by examining yield spread volatility as a function of the credit rating. The EBITDA interest coverage ratio is highly correlated to the market's relative risk levels as a function of the credit rating. Accordingly, market prices are directly influenced by changes in this ratio. Because the EBITDA interest coverage ratio incorporates both business risk and financial risk into one measure, credit analysts and bond investors who wish to identify value in the corporate bond market should strive to forecast trends in this dynamic ratio.