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Understanding Credit Risk: A Classroom Experiment

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  • Maroš Servátka
  • George Theocharides

Abstract

This classroom experiment introduces students to the notion of credit risk and expected return, by allowing them to trade on comparable corporate bond issues from two types of markets: investment-grade and high-yield markets. Investment-grade issues have a lower probability of default than high-yield issues and thus provide a lower yield. Participants can earn money in three ways: from coupon payments, from the face value of the bond, and by capital gains. While participating in an experiment, students learn about the notion of risk and return, how credit risk affects bond prices, the movement of bond prices through time, and other general characteristics of the bond markets.

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File URL: http://hdl.handle.net/10.1080/00220485.2011.536492
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

Volume (Year): 42 (2011)
Issue (Month): 1 (January)
Pages: 79-86

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Handle: RePEc:taf:jeduce:v:42:y:2011:i:1:p:79-86

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  1. Forsythe, Robert & Palfrey, Thomas R. & Plott, Charles R., . "Asset Valuation in an Experimental Market," Working Papers 299, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2007. "Asset Bubbles without Dividends - An Experiment," Sonderforschungsbereich 504 Publications 07-01, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  3. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
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