Abstract
This paper provides a model for how the corporate bond default risk influences the systematic risk and an empirical analysis of the systematic and idiosyncratic parts of U.S. corporate bond returns during 2001-2005. The average corporate bond beta is low and positive (0.06). Investment grade bonds have negative betas (between -0.01 and -0.13) and non-investment grade bonds have positive betas (between 0.11 and 1.48), but both groups have similar within groups systematic risks. When controls for interest rate and liquidity risks are introduced there are still remaining default probabilities, implying that the default risk is in part systematic and in part idiosyncratic.