Understanding Credit Risk: A Classroom Experiment
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.
|Date of creation:||11 Dec 2007|
|Date of revision:|
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- Plott, Charles R. & Sunder, Shyam., .
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463, California Institute of Technology, Division of the Humanities and Social Sciences.
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"Asset Valuation in an Experimental Market,"
299, California Institute of Technology, Division of the Humanities and Social Sciences.
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0439, University of Heidelberg, Department of Economics.
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