Structural Recovery of Face Value at Default
30 Pages Posted: 14 Dec 2005 Last revised: 8 Feb 2019
Date Written: October 2018
We carefully study the transmission mechanisms from default-free rates to corporate bond prices within structural models of endogenous default risk. The transmission critically depends on whether the model is value-based or EBIT-based, on the assumptions made for the drift of the state variable, and on the way the residual value at default is shared among bondholders. The recovery assumption is crucial: Recovery of Face Value, which entails receiving the same share of residual value at default regardless of the remaining maturity, greatly helps explaining the empirical evidence on bond-price sensitivities to interest rates.
Keywords: Bond risk management, Duration, Structural endogenous default risk, Recovery forms
JEL Classification: G12, G13, G33
Suggested Citation: Suggested Citation