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Archive » January 2020 » Bond pricing and default risk, new valuation techniques

Bond pricing and default risk, new valuation techniques

Aldo Letizia
January 2020 - n. 1
Keywords: Strumenti finanziari, rischio di credito, probabilità di default
Jel codes: G21, G32

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.

 

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