The effects of default and call risk on bond duration

This paper examines the effects of default risk, call risk, and their interactions on bond duration. We find that call risk decreases durations of default-free bonds, while default risk alone generally decreases durations for risky bonds with only a few exceptions. The joint effect of default and ca...

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Bibliographic Details
Published in:Journal of banking & finance 2009-09, Vol.33 (9), p.1700-1708
Main Authors: Xie, Yan Alice, Liu, Sheen, Wu, Chunchi, Anderson, Bing
Format: Article
Language:English
Subjects:
Bond ratings
Bonds
Call provision
Credit risk
Default
Default risk
Default risk Call provision Duration Yield spreads Discount and premium
Discount and premium
Duration
Financial analysis
Financial risks
Impact analysis
Studies
Time
Valuation
Yield spreads
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Summary:This paper examines the effects of default risk, call risk, and their interactions on bond duration. We find that call risk decreases durations of default-free bonds, while default risk alone generally decreases durations for risky bonds with only a few exceptions. The joint effect of default and call risk always results in shorter durations for corporate bonds. Controlling for the effect of default risk, call risk has a negative effect on duration, which diminishes as bond ratings decline. Finally, the effect of call risk on duration depends on bond characteristics. Empirical evidence shows that the effect of call risk is smaller for discount bonds and for deep-discount fallen angels.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2009.04.004