n South African Journal of Economic and Management Sciences - Adapting the Macaulay duration for defaultable and option-embedded bonds : economics
|Article Title||Adapting the Macaulay duration for defaultable and option-embedded bonds : economics|
|© Publisher:||University of Pretoria|
|Journal||South African Journal of Economic and Management Sciences|
|Author||G. Van Vuuren and P. Styger|
|Publication Date||Jun 2008|
|Pages||172 - 189|
|Keyword(s)||C13, E43 and G12|
ISI Social Science
Most contemporary bonds have embedded options and all face the possibility of default. Both features introduce risk (the former market risk and the latter credit risk) by altering the quantity and timing of the promised cash flows. The Macaulay duration, although a popular risk tool, is increasingly unable to cope in this complex financial environment. While the Macaulay duration has undergone modifications before, a new theoretical framework is now introduced which augments its functionality while retaining its tractability. The approach - though still unable to isolate the effects of the two features - yields consistent results which agree well with empirical data.
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