Article: Valuation Models for Default-Risky Securities: An Overview.

Valuing financial securities often assumes that the contractual obligations of the security are going to be honored. However, frequently a party to a contract will default on its obligations. An issuer of a corporate bond may be unable to make its promised coupon and principal payments, and a party to a derivatives contract such as an interest rate swap may default on the periodic payments of the swap contract.

Because the contractual features of defaultable securities are usually complex and it may be difficult to find comparable securities for which to observe prices, valuation based on simple rules of thumb is often infeasible. For example, one may have to ...

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