An Analytical Model of Interest Rate Differentials and Different Default Recoveries

Jess B. Yawitz

Journal of Financial and Quantitative Analysis, 1977, vol. 12, issue 3, 481-490

Abstract: In this paper we have extended the Bierman-Hass model to include the effect of a second parameter, the terms of settlement in the event of default. The addition of this second factor was found to not alter the independence between a bond's risk differential and its maturity. Our analysis of the required risk differential for various borrower credit characteristics demonstrates the tradeoff between p and γ. Throughout, we have assumed the loan size does not affect p or γ.

Date: 1977
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