Default- and Call-Adjusted Duration for Corporate Bonds

by Gady Jacob of the University of Manitoba, and
Gordon S. Roberts of York University

December 2003

Abstract: Call and default can potentially alter the timing and amounts of promised cashflows for callable, corporate bonds. While prior research has indicated the theoretical importance of adjusting Macaulay duration for the impacts of default and call, the question of their relative impact remains a matter of debate (Fons (1990) and Duffee (1998)). We develop a theoretical analysis incorporating both default and call effects on duration and test its implications employing a previously unexplored data base of Canadian, investment grade, corporate bond indices containing an unusual provision making it possible to identify callable and noncallable indices.

JEL Classification: G11.

Keywords: Bond's Duration, Default Risk, Callable Bonds, Corporate Bonds.

Published in: Journal of Banking & Finance, Vol. 27, No. 12, (December 2003), pp. 2297-2321.

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