Department of Finance, Insurance and Business Law, The R. B. Pamplin College of Business, Virginia Polytechnic Institute & State University. The author would like to thank Mark Garman, Tom O'Brien, Jack Broughton, Steve Buser (the co-editor), René Stulz (the editor), and two anonymous referees for helpful comments and suggestions. Support was provided by a summer research grant from the VPI Department of Finance.
Default Risk and the Duration of Zero Coupon Bonds
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 1, pages 265–274, March 1990
How to Cite
CHANCE, D. M. (1990), Default Risk and the Duration of Zero Coupon Bonds. The Journal of Finance, 45: 265–274. doi: 10.1111/j.1540-6261.1990.tb05092.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper applies a contingent claims approach to examine the duration of a zero coupon bond subject to default risk. One replicating portfolio for a default-prone zero coupon bond contains a long position in the default-free asset plus a short position in a put option on the underlying assets. The duration of the bond is shown to be a weighted combination of the duration of the default-free bond and the put option. The duration is less than maturity and is not an immunizing duration. The technique is then extended to subordinated debt.