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THE RISK STRUCTURE OF INTEREST RATES AND INTERDEPENDENT BORROWING COSTS: THE IMPACT OF MAJOR DEFAULTS
Author(s) -
Smith Richard L.,
Booth James R.
Publication year - 1985
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/j.1475-6803.1985.tb00390.x
Subject(s) - default , interdependence , bond , default risk , interest rate , economics , actuarial science , yield curve , business , econometrics , credit risk , monetary economics , finance , political science , law
This paper develops a new methodology for evaluating the impact of economic events on bond yields. Term structure information and implicit forward rates are used to generate expected bond yields, and the difference between actual and expected yields is interpreted as the information effect of the event. The methodology is applied to two studies of municipal default: the New York City default and the more recent Washington Public Power Supply System (WPPSS) default. The analysis provides evidence that the New York City default did have a significant impact on the interest cost of municipal financing in general. In the case of WPPSS, however, there is no indication of a significant default impact.