Default Risk and the Effective Duration of Bonds

David Babbel, Craig Merrill and William Panning

Financial Analysts Journal, 1997, vol. 53, issue 1, 35-44

Abstract: Default risk creates difficulties for fixed-income portfolio managers in measuring a portfolio's exposure to interest rate risk. It also heightens the anxiety of traders and arbitragers who are hedging their investments, and it compounds financial institutions' problem of matching assets and liabilities. The consensus among researchers is that credit risk shortens the effective duration of corporate bonds. This paper provides estimates of how much shorter durations become because of credit risk. These estimates are based on observable data and easily estimated bond pricing parameters. Because the duration measures are taken with respect to movements in a common reference rate of interest, they can be used with greater confidence than can other measures when attempting to compute the duration of a portfolio of bonds subject to varying degrees of credit risk.

Date: 1997
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.2469/faj.v53.n1.2054 (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:ufajxx:v:53:y:1997:i:1:p:35-44

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.2469/faj.v53.n1.2054

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().