Default risk and the duration of zero coupon bonds

Article Abstract:

This paper applies a contingent claims approach to examine the duration of a zero coupon bond subject to default risk. One replicating portfolio for a default-prone zero coupon bond contains a long position in the default-free asset plus a short position in a put option on the underlying assets. The duration of the bond is shown to be a weighted combination of the duration of the default-free bond and the put option. The duration is less than maturity and is not an immunizing duration. The technique is then extended to subordinated debt. (Reprinted by permission of the publisher.)

Research, Risk (Economics), Options (Finance), Zero coupon securities, Default (Finance)

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Callable bonds: a risk-reducing signalling mechanism

Article Abstract:

Both short-term financing and the issuance of callable bonds can be used by a corporation to finance itself while indicating its brighter economic prospects in the future. However, the short-term financing is associated with weakened risk-sharing on capital markets, according to this study. Equity issuances generate better risk-sharing. The analysis seeks to explain the highly infrequent occurrence of long-term, non-callable bonds issued to finance corporations or support corporate capital structures.

Economic aspects, Finance, Risk management, Capital market, Capital markets, National debt, Corporations, Public debts, Corporate finance

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Commodity Bonds and Consumption Risks

Article Abstract:

The demand for commodity bonds is examined in a dynamic programming model. The use of commodity bonds to provide future consumption guarantees is questioned, because of the variability of future income stream, the commodity bond provides a form of protection against price change.

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