Understanding The Role of Recovery In Default Risk Models

Topics:
Commercial Lending
Tags:
Bond,
Recovery
Source:
Board of Governors of the Federal Reserve System

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Overview: This article presents a framework for studying the role of recovery on default debt prices. These debt models have the ability to differentiate the impact of recovery rates and the default probability, and can be utilized to invert the market expectation of recovery rates implicit in bond prices. Empirical implementation of these models suggests two central findings. First, the recovery concept that specifies recovery as a fraction of the discounted par value has broader empirical support. Second, parametric debt valuation models can provide a useful assessment of recovery rates embedded in bond prices. This article has attempted to model recovery and comprehends their impact on debt values.

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Format: PDF | Size: 521KB | Date: Nov 2001 | Pages: 39

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