Understanding Credit Risk: A Classroom Experiment

Maroš Servátka and George Theocharides

The Journal of Economic Education, 2011, vol. 42, issue 1, 79-86

Abstract: This classroom experiment introduces students to the notion of credit risk and expected return, by allowing them to trade on comparable corporate bond issues from two types of markets: investment-grade and high-yield markets. Investment-grade issues have a lower probability of default than high-yield issues and thus provide a lower yield. Participants can earn money in three ways: from coupon payments, from the face value of the bond, and by capital gains. While participating in an experiment, students learn about the notion of risk and return, how credit risk affects bond prices, the movement of bond prices through time, and other general characteristics of the bond markets.

Date: 2011
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Working Paper: Understanding Credit Risk: A Classroom Experiment (2007)
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DOI: 10.1080/00220485.2011.536492

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