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A Duration Model For Defaultable Bonds
Author(s) -
Jacoby Gady
Publication year - 2003
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.00049
Subject(s) - duration (music) , bond , economics , econometrics , maturity (psychological) , default risk , ex ante , yield (engineering) , actuarial science , financial economics , monetary economics , credit risk , finance , psychology , macroeconomics , physics , thermodynamics , developmental psychology , acoustics
I extend recent theoretical work on duration and derive an improved model for the risk‐adjusted duration of corporate bonds. My ex‐ante risk‐adjusted duration is the sum of the bond's Fisher‐Weil duration and the duration of the potential expected delay in recovery caused by the default option. My main conclusion is that failing to adjust duration for default is costly for high‐yield bonds, especially those with a shorter time to maturity. For investment‐grade bonds, this cost is trivial for all maturities.