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Understanding Credit Risk: A Classroom Experiment

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Author Info
Maroš Servátka () (University of Canterbury)
George Theocharides

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Abstract

This classroom experiment introduces students to the notion of credit risk by allowing them to trade on comparable corporate bond issues from two types of markets - investment-grade and high-yield. Investment-grade issues have a lower probability of default than high-yield issues, and thus provide a lower yield. There are three ways in which participants can earn money - from coupon payments, the face value of the bond, and by capital gains. Students learn about the notion of risk and return, how credit risk affects bond prices, as well as some general characteristics of the bond markets.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/0706.pdf
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Publisher Info
Paper provided by University of Canterbury, Department of Economics in its series Working Papers in Economics with number 07/06.

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Length: 22 pages
Date of creation: 11 Dec 2007
Date of revision:
Handle: RePEc:cbt:econwp:07/06

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Web page: http://www.econ.canterbury.ac.nz
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Related research
Keywords: Teaching Experiment; Credit Risk; Bond Market; Risk and Return;

Find related papers by JEL classification:
A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September. [Downloadable!] (restricted)
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  2. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-67, May. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
    Other versions:
  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. [Downloadable!]
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Statistics
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