Abstract
Interest rate risk and credit risk are interrelated, so analysts must adapt the duration measure to deal with default risk. Various closed-form and numerical solutions that consider the relationship among interest rates, stock prices, and debt maturity are available to help analysts estimate the impact of default risk on the value of bonds, but analysts need to understand each model's assumptions and limitations. Connecting default risk to effective duration can also help analysts understand how default risk influences bond prices for various relative-yield and interest rate paths.
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