Defaultable Bond Pricing Model at Maturity Time
Defaultable Bond Pricing Model at Maturity Time
Author : NORA AMELDA RIZAL; Sudarso Kaderi Wiryono; Budhi Arta Surya Published on : International Conference on Business, Management, Tourism and Hospitality (BIZMATOUR 2015)
Abstract
This paper introduces the preliminary work for portfolio optimization where it aims to find an optimal solution for portfolio in finite time-horizon under default assets. Default assets mean that the assets has a chance to be liquidated in the span of time-horizon. To determine the default assets, the reduced form method will be used, as it is more applicable because the assets price can be linkage with the credit risk. Furthermore, the dynamic of asset price that will be derived here is the corporate bond where the payment penalty will be paid at maturity time. This bond pricing model will be derived analytically by using Ito Calculus in the form of the movement of the rate of return and the credit spread, where both rates are in the form of Vasicek model.
