New study reveals how interest rate fluctuations impact corporate bond prices.
The article explores how changes in interest rates and the risk of default affect the price and riskiness of corporate bonds. By considering both interest rate risk and default risk, the researchers found that Merton's previous conclusions about corporate bond risk are no longer accurate in a setting with fluctuating interest rates. They extended Merton's analysis to include stochastic interest rates, showing that the relationship between bond prices and risk measures is more complex than previously thought.