Understanding Credit Risk: A Classroom Experiment

Type of content
Discussion / Working Papers
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Publisher
University of Canterbury. Department of Economics and Finance
Journal Title
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Language
Date
2007
Authors
Servatka, M.
Theocharides, G.
Abstract

This classroom experiment introduces students to the notion of credit risk by allowing them to trade on comparable corporate bond issues from two types of markets - investment-grade and high-yield. Investment-grade issues have a lower probability of default than high-yield issues, and thus provide a lower yield. There are three ways in which participants can earn money - from coupon payments, the face value of the bond, and by capital gains. Students learn about the notion of risk and return, how credit risk affects bond prices, as well as some general characteristics of the bond markets.

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Citation
Servatka, M., Theocharides, G. (2007) Understanding Credit Risk: A Classroom Experiment..
Keywords
teaching experiment, credit risk, bond market, risk and return, A20, C90, D84
Ngā upoko tukutuku/Māori subject headings
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