Faculty of Economics and Business Administration Publications Database

Bond Durations: Corporates vs. Treasuries

Munk, Claus
Volume: 31
Number: 12
Pages: 3720 - 3741
Month: December
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2007
Keywords: Duration; Interest rate risk; Default risk; Intensity models
Abstract: We compare the durations (the percentage price sensitivity with respect to the default-free short rate) of corporate and Treasury bonds in the reduced-form, intensity-based credit risk modeling framework. In a frequently used intensity-based model for corporate bond valuation we provide an example showing that, given the parameter estimates found in empirical studies, the duration of a corporate coupon bond may very well be larger than the duration of a similar Treasury bond. This finding contrasts with conclusions of previous studies. In a general, intensity-based recovery of market value framework we provide a simple sufficient condition for when the duration of a corporate bond will be smaller than that of a similar Treasury bond. We also provide an upper bound on the duration of the corporate coupon bond.