We thank William T. Moore (the editor) and Gady Jacoby (the referee) for very helpful comments and suggestions. All remaining errors are ours.
DURATION, DEFAULT RISK, AND THE TERM STRUCTURE OF INTEREST RATES
Article first published online: 25 OCT 2005
Journal of Financial Research
Volume 28, Issue 4, pages 539–554, December 2005
How to Cite
Xie, Y. A., Liu, S. and Wu, C. (2005), DURATION, DEFAULT RISK, AND THE TERM STRUCTURE OF INTEREST RATES. Journal of Financial Research, 28: 539–554. doi: 10.1111/j.1475-6803.2005.00138.x
- Issue published online: 25 OCT 2005
- Article first published online: 25 OCT 2005
We examine the interactive effect of default and interest rate risk on duration of defaultable bonds. We show that duration for defaultable bonds can be longer or shorter than default-free bonds depending on the relation between default intensity and interest rates. Empirical evidence indicates that in most cases duration for defaultable bonds is much shorter than for their default-free counterparts because of the negative relation between default risk and interest rates. Results suggest that the duration measure must be adjusted for the effects of default risk and stochastic interest rates to achieve an effective bond portfolio immunization.