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Bond pricing and default risk, new valuation techniques

Author

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  • Aldo Letizia

    (Banca Popolare Pugliese)

Abstract

The current value of bonds is commonly calculated as a sum of contractual cash flows discounted through defaultfree interest rates, with the addition of an appropriate credit spread. The fact that investors demand higher nominal returns for bonds exposed to credit risk is invoked as the main argument in supporting this approach. Although widely applied in practice, it is a simplistic solution for several reasons. More refined cash flow mapping techniques lead to an accurate assessment of traded bonds on the basis of market information alone

Suggested Citation

  • Aldo Letizia, 2020. "Bond pricing and default risk, new valuation techniques," BANCARIA, Bancaria Editrice, vol. 1, pages 54-64, January.
    • Handle: RePEc:ban:bancar:v:1:y:2020:m:january:p:54-64
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    File URL: https://bancaria.it/en/bond-pricing-and-default-risk-new-valuation-techniques
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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