2012/03/30 by Sara Cecchetti, Cecchetti, Sara, Di Cesare, Antonio +1
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Distress and Bankruptcy Prediction #Pricing of Securities (q-fin.PR) #Risk Management (q-fin.RM) #Stochastic processes and financial applications #q-fin.PR #q-fin.RM
paper · pdf · doi:10.48550/arxiv.1203.6723
arxiv created 2012/03/30 · openalex publication_date 2012/03/30 · arxiv updated 2012/04/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The paper analyzes the mathematics of the relationship between the default risk and yield-to-maturity of a coupon bond. It is shown that the yield-to-maturity is driven not only by the default probability and recovery rate of the bond but also by other contractual characteristics of the bond that are not commonly associated with default risk, such as the maturity and coupon rate of the bond. In particular, for given default probability and recovery rate, both the level and slope of the yield-to-maturity term structure depend on the coupon rate, as the higher the coupon rate the higher the yield-to-maturity term structure. In addition, the yield-to-maturity term structure is upward or downward sloping depending on whether the coupon rate is high or low enough. Similar qualitative results also holds for CDS spreads. Consequently, the yield-to-maturity is an indicator that must be used cautiously as a proxy for default risk.