Bond durations: Corporates vs. Treasuries

The announcement impact of seasoned equity offerings on bondholder wealth

“…Previous research has matched corporate bonds to Treasury bonds subjectively using maturity and coupon rate. A more precise measure of the sensitivity of a given bond to interest rate movements is provided by the bond's duration (Kraft and Munk, 2007). We calculate the duration for each corporate and Treasury bond on each announcement date and identify matching corporate/Treasury bond pairs by minimizing the absolute difference between the corporate bond and Treasury bond durations.…”

The effects of default and call risk on bond duration

“…They find that the duration for a defaultable straight bond can be longer or shorter than that of its default-free counterpart, depending upon the relation between default intensity and interest rates. Kraft and Munk (2007) provide a sufficient condition for when the duration of a corporate bond will be longer or shorter than that of a similar Treasury bond. Fons (1990) estimates the empirical durations of corporate bond indices and finds that over the 1980-1988 period, the durations of corporate bond indices are always less than the Macaulay durations, while the difference between these two duration measures widens as bond ratings decline.…”

A comprehensive structural model for defaultable fixed-income bonds

“…Recent articles investigate the interactive effect of credit and interest rate risk on defaultable bonds (see Xie et al 2005, Kraft andMunk 2007), which, however is not completely understood. Intuition suggests that the durations of defaultable or equivalent default-free bonds may differ, because default stops a contracted interest or principal payment thus altering the bond sensitivity to changes in the default-free short-term interest rate.…”

“…On the other hand, Xie et al (2005) shows that the duration of a defaultable bond can be longer or shorter than that of a similar Treasury bond, depending on the relation between default intensity and interest rates, which is supported by empirical evidence. Thus, as Kraft and Munk (2007) point out, 'the statements on the duration of a corporate bond seem to be conflicting'. Kraft and Munk show that both the opposite conclusions are possible, depending on the parameter relating the default intensity with the default-free short-term interest rate.…”

“…Kraft and Munk show that both the opposite conclusions are possible, depending on the parameter relating the default intensity with the default-free short-term interest rate. In Kraft and Munk (2007) the problem is faced in a reduced-form framework and a simple sufficient condition is provided implying that the duration of a corporate bond is smaller than that of its default-free counterpart, in empirically relevant settings.…”