A Duration Model For Defaultable Bonds

Gady Jacoby

Journal of Financial Research, 2003, vol. 26, issue 1, 129-146

Abstract: I extend recent theoretical work on duration and derive an improved model for the risk‐adjusted duration of corporate bonds. My ex‐ante risk‐adjusted duration is the sum of the bond's Fisher‐Weil duration and the duration of the potential expected delay in recovery caused by the default option. My main conclusion is that failing to adjust duration for default is costly for high‐yield bonds, especially those with a shorter time to maturity. For investment‐grade bonds, this cost is trivial for all maturities.

Date: 2003
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