Bond Durations: Corporates vs. Treasuries

by Holger Kraft of the University of Kaiserslautern, and
Claus Munk of University of Southern Denmark

January 19, 2007

Abstract: We compare the durations (the percentage price sensitivity with respect to the default-free short rate) of corporate and Treasury bonds in the reduced-form, intensity-based credit risk modeling framework. In a frequently used intensity-based model for corporate bond valuation we provide an example showing that, given the parameter estimates found in empirical studies, the duration of a corporate coupon bond may very well be larger than the duration of a similar Treasury bond. This finding contrasts with conclusions of previous studies. In a general, intensity-based recovery of market value framework we provide a simple sufficient condition for when the duration of a corporate bond will be smaller than that of a similar Treasury bond. We also provide an upper bound on the duration of the corporate coupon bond.

JEL Classification: E43, G12.

Keywords: duration, interest rate risk, default risk, intensity models.

Forthcoming in: Journal of Banking & Finance, (2007).

Books Referenced in this Paper:  (what is this?)

Download paper (260K PDF) 28 pages

[Home] [Other Credit Risk Papers]

[ Home ] [ Up ]

Please contact me with problems or suggestions.
Copyright © 2000-2008 DefaultRisk.com
Last modified: May 15, 2008