Bonds Interest Rate

For investment grade bonds the risk of default is low but the return is high! how it is possible?

For a investment grade bond (A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's) the default rate is very low almost close to 0.1% but still the yield offered on this bonds are high! thus default rate risk cant explain the high bond yield!! what is the reason behind it? The main part of the question is investment grade bonds are paying much more then they should according to the default risk, why is so!!

Public Comments

1. What do you consider as high, 5% ? Junk bonds usually pay 10% and that's where the risk is.
2. You are kidding me, right? Define low.... In general, the rating agencies reputations have been slaughtered because of default problems with highly rated bonds over the last 10 years. (Enron, WorldCom, AIG, Lehman, etc...) Very few major investment houses take the principle rating houses word without doing their own homework and quite a few use "rouge" rating houses for secondary research. The dirty little secret of the industry is that S&P and Moody's have a government sanctioned monopoly that forces everyone to pay attention to their ratings...without that monopoly they would both now be dead businesses. (Notice that Mr Buffiett and company have been dumping Moody's stock...?) The bottom line is that the interest rate (yield to maturity) is your best guide to the real risk the marketplace has assigned to a bond issue.
3. Default rates have been much higher than 0.1% for investment grade bonds. I don't know where you got your figures, see the links to find where I get my figures.
4. What do you define as "high"? We're talking relative terms here. The yield on junk bonds will generally be higher that that on investment grade bonds, precisely because of the default risk.
5. Give us more detail. What do you mean by high? And remember that rating agencies considered now worthless securities as investment grade prior to the financial crisis.