This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990's show that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields. The paper measures the causes of variation in corporate bond yield spreads across companies and over time. It evaluates the volatility effect while controlling for composition effects, the demand for the liquidity provided by Treasury bonds, and special features of corporate bonds. The study uses a large panel dataset, the Fixed Income Securities Database (FISD), matched with the National Association of Securities Commissioners (NAIC) database on bond transactions from 1995-99. The results show that equity volatility and credit ratings each explain about a third of the variation in corporate bond yield spreads. The paper also explores the longer-term time-series behavior of corporate bond yields, as summarized by S&P and Moody's yield indexes. It finds that movements in idiosyncratic volatility help to explain these movements in average yields over time. The paper also discusses the theoretical literature on the pricing of corporate bonds, distinguishing between structural and reduced form models. It finds that equity volatility has a significant effect on corporate bond yields, more so than predicted by the simple structural model of Merton (1974). The results suggest that equity volatility is an important determinant of corporate bond yield spreads, particularly for firms with a high ratio of long-term debt to assets. The findings are robust to the use of a market model with an estimated beta, the use of a longer or shorter time window to estimate volatility, and the use of the Nelson-Siegel method to adjust for the slope of the term structure.This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990's show that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields. The paper measures the causes of variation in corporate bond yield spreads across companies and over time. It evaluates the volatility effect while controlling for composition effects, the demand for the liquidity provided by Treasury bonds, and special features of corporate bonds. The study uses a large panel dataset, the Fixed Income Securities Database (FISD), matched with the National Association of Securities Commissioners (NAIC) database on bond transactions from 1995-99. The results show that equity volatility and credit ratings each explain about a third of the variation in corporate bond yield spreads. The paper also explores the longer-term time-series behavior of corporate bond yields, as summarized by S&P and Moody's yield indexes. It finds that movements in idiosyncratic volatility help to explain these movements in average yields over time. The paper also discusses the theoretical literature on the pricing of corporate bonds, distinguishing between structural and reduced form models. It finds that equity volatility has a significant effect on corporate bond yields, more so than predicted by the simple structural model of Merton (1974). The results suggest that equity volatility is an important determinant of corporate bond yield spreads, particularly for firms with a high ratio of long-term debt to assets. The findings are robust to the use of a market model with an estimated beta, the use of a longer or shorter time window to estimate volatility, and the use of the Nelson-Siegel method to adjust for the slope of the term structure.