This paper examines the risks and returns of long-term low-grade bonds for the period 1977–1989. We find: (1) low-grade bonds realized higher returns than higher-grade bonds and lower returns than common stocks, and low-grade bonds exhibited less volatility than higher-grade bonds due to their call features and high coupons; (2) there is no relation between the age of low-grade bonds and their realized returns; cyclical factors explain much of the observed relation between default rates and bond age; and (3) low-grade bonds behave like both bonds and stocks. Despite this complexity there is no evidence that low-grade bonds are systematically over- or under-priced.