Duration for bonds with default risk

Bond durations: Corporates vs. Treasuries

“…In the very simple Merton (1974) setting for corporate debt valuation, Chance (1990) shows that the duration of a defaultable zerocoupon bond is smaller than the duration of the similar default-free zero-coupon bond. Fooladi et al (1997) define and study a duration-style measure in a specific pricing model different from the mainstream models applied today for the pricing of defaultable claims. Babbel et al (1997) set up a pricing model with the default-free short rate and the value of the issuing firm as state variables.…”

Measuring efficiency of the banking industry before and after the recent financial crisis: some international evidence

“…One way to address this issue is to develop valuation models similar to that of Fooladi, Roberts, and Skinner (1997) and Jonkhart (1979) who used probability of default in pricing corporate bonds. To apply the essence of their models, consider a firm at the beginning of time t. Given that it has survived the foregoing t-1 periods without any interruptions, there is a probability p t that it will survive period t, in which case the firm pays y t per share to stockholders.…”

“…While we made that assumption for simplicity, we have no strong economic justification for that. In a study of duration of bonds with default risk, Fooladi, Roberts, and Skinner (1997) assume that as bond approaches maturity, the chance of default is higher. In that regards, probability of survival moves exponentially through the time (i.e., 0 t t p p = ).…”

Interest risk and default risk: A conditional volatility study

“…They outline two alternative routes: models that arise from a theoretical valuation of contingent assets, such as those in Bierwag and Kaufman [1988], Fons [1990], andFooladi, Roberts, andSkinner [1997]; and those that do not arise from this scheme, such as those in Chance [1990], Leland and Toft [1996], and Babbel, Merrill, and Panning [1997].…”