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An Analytical Model of Interest Rate Differentials and Different Default Recoveries

Published online by Cambridge University Press:  19 October 2009

Jess B. Yawitz
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Extract

In this paper we have extended the Bierman-Hass model to include the effect of a second parameter, the terms of settlement in the event of default. The addition of this second factor was found to not alter the independence between a bond's risk differential and its maturity. Our analysis of the required risk differential for various borrower credit characteristics demonstrates the tradeoff between p and γ. Throughout, we have assumed the loan size does not affect p or γ.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 3 , September 1977 , pp. 481 - 490
Copyright
Copyright © School of Business Administration, University of Washington 1977

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References

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