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Integrating the Risk and Term Structure of Interest Rates

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  • Decamps, J.P.

Abstract

Merton (1974) analysed the risk structure of corporate bonds under the assumption of a flat term structure of interest rates. We clarify his results and extend them to the case of stochastic interest rates. As a consequence we deal simultaneously with interest rate risk and with default risk. We investigate the price of a corporate bond and the various measures of the riskness of a corporate bond proposed by Merton ((i) the Yield difference between the corporate bond and a default free bond with the same characteristics, (ii) the standard deviation of the rate of return of a corporate bond). We demonstrate and we explain why several of Merton's conclusions are no longer valid in a stochastic term structure framework.
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Suggested Citation

  • Decamps, J.P., 1992. "Integrating the Risk and Term Structure of Interest Rates," Papers 92.284, Toulouse - GREMAQ.
    • Handle: RePEc:fth:gremaq:92.284
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    References listed on IDEAS

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    1. In Joon Kim & Krishna Ramaswamy & Suresh Sundaresan, "undated". "The Valuation of Corporate Fixed Income Securities," Rodney L. White Center for Financial Research Working Papers 32-89, Wharton School Rodney L. White Center for Financial Research.
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    Keywords

    risk ; interest rate;

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