Bond Durations: Corporates vs. Treasuries
by Holger Kraft of the University of Kaiserslautern, and
January 19, 2007
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.
Keywords: duration, interest rate risk, default risk, intensity models.
Published in: Journal of Banking & Finance, Vol. 31, No.12, (December 2007), pp. 3720-3741.