The effects of default and call risk on bond duration |
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Authors: | Yan Alice Xie Sheen Liu Chunchi Wu Bing Anderson |
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Institution: | 1. School of Management, The University of Michigan, Dearborn, MI 48126, United States;2. College of Business, Washington State University, Vancouver, WA 98686, United States;3. Robert J. Trulaske, Sr. College of Business, University of Missouri, Columbia, MO 65211, United States;4. Orfalea College of Business, California Polytechnic State University, San Luis Obispo, CA 93407, United States |
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Abstract: | This paper examines the effects of default risk, call risk, and their interactions on bond duration. We find that call risk decreases durations of default-free bonds, while default risk alone generally decreases durations for risky bonds with only a few exceptions. The joint effect of default and call risk always results in shorter durations for corporate bonds. Controlling for the effect of default risk, call risk has a negative effect on duration, which diminishes as bond ratings decline. Finally, the effect of call risk on duration depends on bond characteristics. Empirical evidence shows that the effect of call risk is smaller for discount bonds and for deep-discount fallen angels. |
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Keywords: | G12 |
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