TITLE:
Term Structure of Defaultable Bonds with Recovery of Market Value
AUTHORS:
Ruidong Wang, Xiyue Tan, Jianping Fu
KEYWORDS:
Credit Risk, Defaultable Bond, Recovery of Market Value, Risk-Neutral Pricing, Term Structure of Interest Rate
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.15 No.3,
August
8,
2025
ABSTRACT: This paper reproduces the main result of Duffie and Singleton [1] and extends it to defaultable bonds with both continuous and periodic coupon payments. Specifically, if the recovery of a defaultable bond after default follows the recovery of market value (RMV) assumption, its implied term structure of interest rates takes the form
r
¯
(
t
)=r(
t
)+(
1−R
)λ(
t
)
, where
r(
t
)
is the risk-free rate,
λ(
t
)
is the entity’s default intensity, and
R
is the recovery rate of market value. These results are derived within the risk-neutral pricing framework using straightforward and elementary method.