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In Rememberance: World Trade Center (WTC)

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Bond Durations: Corporates vs. Treasuries

by Holger Kraft of the University of Kaiserslautern, and
Claus Munk of the University of Southern Denmark

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.

JEL Classification: E43, G12.

Keywords: duration, interest rate risk, default risk, intensity models.

Published in: Journal of Banking & Finance, Vol. 31, No.12, (December 2007), pp. 3720-3741.

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