The Effects of the Spread Risk in Terms of Basis Points From Changes in the Market Prices of Callable Bond Future Due to Credit Risk : Evidence From the Twist Effect of the Yield Curve in Greece

In this article, we analyze the effects of the spread risk in terms of basis points from changes in the market prices of callable bond future due to credit risk. Due to the fact that fixed – income securities are debt that is issued and transferred between two parties there is significant amount of credit risk involved in terms of default risk, credit spread risk and downgrade risk. Default risk is related to the risk that one party will not be able to pay the periodic amounts of interest or the principal at maturity. Corporate bonds carry a significant degree of credit risk as they are related to the liability side of the company. When the credit spread of the callable bond future relative to a treasury bond widen, then, the callable bond future price decline in relation to its benchmark. It is not a good sign that credit spread widens especially when the economy is in a recession as the probability of default is high. We apply the example of the callable bond future spread risk in Greece. We find that the spread risk widens as the default risk of the callable bond future increase