Paper Summary:

This paper asserts that systematic risk, which refers to the risk in the market overall, is not an appropriate measure of risk for corporate bonds. To test this hypothesis, the author analyzes the relationship between bond returns and the market yield of a Champion International bond using the beta-based capital asset pricing model. The paper reviews factors, which affect corporate bonds, such as maturity, expected cash flow value, liquidity, recovery rates and the company's bond rating.

From the Paper:

"Maturity impacts corporate bond prices by moving them further from the face value. The time value of the volatility is greater as the maturity is longer. The time value of a bond's cash flows is more likely to shift, and in greater intensity, the farther away the maturity is. This is because the largest flow, which is the face value, is moved farther in time. The risk therefore increases as the maturity is farther out. The result is that bond prices are typically decline as the maturity increases, in order to account for the risk represented by time value."

Sample of Sources Used:

• Gebhardt, William R.' Hvidkjaer, Soren; Swaminathan, Bhaskaran. (2004). The Cross-Section of Expected Corporate Bond Returns: Betas or Characterstics? Journal of Financial Economics. Vol. 75 pp85-114.

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