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The slope of the credit yield curve for speculative-grade issuers

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Author Info
Jean Helwege
Christopher M. Turner
Abstract

Many theoretical bond pricing models predict that the slope of the credit yield curve facing highly leveraged firms is negative. Previous empirical research by Sarig and Warga (1989) and Fons (1994) confirms this view of high yield bonds. We show that these results largely owe to sample selection bias associated with the debt maturity choice. When the credit quality of the issuer is held constant, as in the case of matched bond samples, the typical credit yield curve facing speculative-grade issuers is upward-sloping.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9725.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9725

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Keywords: Corporate bonds Corporations - Finance

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  1. Sarig, Oded & Warga, Arthur, 1989. " Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1351-60, December. [Downloadable!] (restricted)
  2. Lee Crabbe, 1991. "Callable corporate bonds: a vanishing breed," Finance and Economics Discussion Series 155, Board of Governors of the Federal Reserve System (U.S.).
  3. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. [Downloadable!] (restricted)
  4. Leland E. Crabbe & Jean Hewlege, 1994. "Alternative Tests of Agency Theories of Callable Corporate Bonds," Financial Management, Financial Management Association, vol. 23(4), Winter.
  5. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  6. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
  7. Pitts, C G C & Selby, M J P, 1983. " The Pricing of Corporate Debt: A Further Note," Journal of Finance, American Finance Association, vol. 38(4), pages 1311-13, September. [Downloadable!] (restricted)
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