Using Utility Functions to Model Risky Bonds

Joanna Goard

Applied Mathematical Finance, 2007, vol. 14, issue 3, 261-289

Abstract: This paper prices defaultable bonds by incorporating inherent risks with the use of utility functions. By allowing risk preferences into the valuation of bonds, nonlinearity is introduced in their pricing. The utility-function approach affords the advantage of yielding exact solutions to the risky bond pricing equation when familiar stochastic models are used for interest rates. This can be achieved even when the default probability parameter is itself a stochastic variable. Valuations are found for the power-law and log utility functions under the interest-rate dynamics of the extended Vasicek and CIR models.

Keywords: utility functions; risky bonds; defaultable bonds (search for similar items in EconPapers)
Date: 2007
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13504860600951652 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:14:y:2007:i:3:p:261-289

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/13504860600951652

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().