The association of default risk factors with the systematic risk of corporate bonds |
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Authors: | Richard M Duvall R S Rathinasamy |
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Institution: | 1. Belmont College, Nashville, TN 2. Ball State University, Muncie, IN
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Abstract: | This study examines the association between bond betas and default risk factors. We find that both long-term debt and the
relative ratio of long-term debt to short-term debt increase the bond beta; two measures of profitability, net income/total
assets and EBIT/total assets and a cash flow measure of cash flow from operations/total assets decrease the bond beta. A proxy
measure of standard deviation of returns is also significantly negatively related to bond betas, confirming the prediction
from the option pricing model. In addition, by using new cash flow measures in the discriminant analysis, we improve on the
successful prediction rate of bond ratings. |
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