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Term Structure of Defaultable Bonds with Recovery of Market Value
School of Science, Tianjin University of Technology, Tianjin, China
School of Science, Tianjin University of Technology, Tianjin, China
School of Science, Tianjin University of Technology, Tianjin, China
- 1 School of Science, Tianjin University of Technology, Tianjin, China
- 2 School of Science, Tianjin University of Technology, Tianjin, China
- 3 School of Science, Tianjin University of Technology, Tianjin, China
Journal of Mathematical Finance·Volume 15 (2025)·Pages 535–549·Published 16 July 2025·DOI10.4236/jmf.2025.153022
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Abstract
This paper reproduces the main result of Duffie and Singleton [1] and extends it to defaultable bonds with both continuous and periodic coupon payments. Specifically, if the recovery of a defaultable bond after default follows the recovery of market value (RMV) assumption, its implied term structure of interest rates takes the form r ¯ ( t ) = r ( t ) + ( 1 − R ) λ ( t ) , where r ( t ) is the risk-free rate, λ ( t ) is the entity’s default intensity, and R is the recovery rate of market value. These results are derived within the risk-neutral pricing framework using straightforward and elementary method.
KeywordsCredit RiskDefaultable BondRecovery of Market ValueRisk-Neutral PricingTerm Structure of Interest Rate
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