That depends, of course, on the type of bond under discussion. But overall, if you consider primarily bonds that are at least investment grade in credit quality, default rates are relatively low. Since the Second World War, and despite a few well-publicized defaults in the corporate sector, no bonds have ever defaulted while currently rated AA. Only two defaults have occurred to bonds rated A. Similar statistics prevail for municipal bonds. (While some bonds that were initially highly rated eventually defaulted, these had been downgraded prior to the actual default. Hence, it is prudent to monitor the ratings of bonds in your portfolio.)
Default rates for junk bonds, which by definition are bonds rated below investment grade, are higher.
Note, however, that even when defaults occur, bond investors seldom lose 100% of the principal value of the bond. Defaulted bonds usually have some salvage value. There is a good deal of speculation in the bonds of defaulted or bankrupt issuers. That is because such bonds may be purchased very cheaply, perhaps as little as 10 to 30 cents on the dollar. Many defaults have taken the form of a suspension of coupon payments. Such bonds are said to be trading flat. If coupon payments are resumed, the price of the bonds can soar. Bondholders may also benefit from the sale of assets of issuers under bankruptcy proceedings. Finally, some bankrupt companies emerge successfully from bankruptcy proceedings, leading to a bonanza for anyone who purchased the bonds while the company was in default.
There is a gradation in risk of default. Any bond that is a direct obligation of the U.S. government is deemed to have zero possibility of default. Bonds issued by federal agencies, or most types of mortgage-backed securities, are deemed to have almost equally high credit quality. Municipal bonds come in a wide variety of ratings, but in the aggregate they have low default rates. Corporates (particularly so-called junk bonds) are far less predictable. And debt of so-called emerging markets is highly speculative.
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