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Bond Yields, Taxes, and the Dimensions of Default Risk
Author(s) -
Skinner Frank S.
Publication year - 1995
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1995.tb00854.x
Subject(s) - bond , corporate bond , default risk , economics , econometrics , municipal bond , loss given default , credit risk , actuarial science , monetary economics , microeconomics , finance , capital requirement , incentive
This work develops and empirically estimates models of bond yields subject to default risk. Parameters for the probability of survival and the recovery rate subsequent to default are included in a model of corporate bond yields that allow a study of interactions among them. The municipal version of the model includes the tax rate as an additional factor. Empirical evidence is found that supports the notion that both dimensions of default, considered jointly, are related to bond quality. In addition, statistically significant differences in tax rates suggest that higher tax rates are associated with higher grade municipal bonds.