Bond Durations: Corporates vs. Treasuries

24 Pages Posted: 14 Mar 2006

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Holger Kraft

Goethe University Frankfurt

Date Written: March 14, 2006

Abstract

We compare the durations of corporate and Treasury bonds in the reduced-form, intensity based credit risk modeling framework. In the case where default risk is independent of default-free interest rates, we provide in each of the three most popular recovery regimes a sufficient condition under which the duration of the corporate bond is smaller than the duration of a similar Treasury bond. In the case where the default intensity and the recovery rate may depend on the default-free interest rate, we also provide a sufficient condition for the duration of a corporate bond to be smaller than the duration of the corresponding Treasury bond, assuming that recovery of market value applies. We illustrate our findings and offer more details in a specific setting in which default-free interest rates follow a Vasicek model and recovery of market value applies with a constant loss rate and a default intensity which is affine in the default-free short rate. While the unanimous conclusion of earlier papers is that the corporate bond has a smaller duration than the corresponding Treasury bond, we demonstrate in this setting that the duration of a corporate coupon bond can very well be greater than that of the similar Treasury bond.

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

JEL Classification: E43, G12

Suggested Citation

Munk, Claus and Kraft, Holger, Bond Durations: Corporates vs. Treasuries (March 14, 2006). Available at SSRN: https://ssrn.com/abstract=890579 or http://dx.doi.org/10.2139/ssrn.890579

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Holger Kraft

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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