Abstract
66 ON THE PRICING OP BOND DEFAULT RISK T he pricing of default risk is a crucial part of fixed-income analysis. Investors wishing to allocate assets across different classes need to be comfortable that the yield spread on corporate bonds over similarmaturity default-free government bonds is sUfficient for the added risk borne. There is no consensus as to the exact cost of a unit of additional risk; the analYSt must juggle a variety offactors to determine a·fairprice. In this.article we give a new interpretation ofthe capital assetpricing model valuation ofbonds subject to default risk. Following Jonkhart [1979] and others, we assume that, between coupon payments, an issuer can default (go bankrupt) with a constant probability p. This leads to a valuation for the bond expressed in terms of p. We then express the bond's ~ in terms of p, and develop some interesting survival probabilities and a capital risk measure based on these probabilities. ',' .
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