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4
votes
1answer
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Use of Girsanov's theorem in bond pricing

Assume that we want to calculate the time $t=0$ price of a bond: $B(0,T) = E_P[\exp(-\int_0^T r_s ds)]$, where $r$ is the interest rate following the SDE $dr_t=k(\theta-r_t)dt+\sigma ...
3
votes
4answers
431 views

Yield of a risky bond

When working with risky bonds, i.e. corporate bonds, what is usually defined as the yield of such a bond? Is it the yield calculated as if the bond was riskless, or is it calculated by properly taking ...