We select a range of ten sets of va

We select a range of ten sets of values for the probability of survival, by varying the first period conditional probability of survival, Pl, from 0.999 to 0.981 in decrements of 0.002. 8 The initial certainty equivalent value for the marginal investor, Q1, is set to 0.995, and the parameter for the fraction of promised principal payments made after default, F,~, at 40 percent.
Since an upward sloping term structure is most common, we assume that the zero-coupon term structure increases from a 6 percent one-year rate towards 8 percent at a decreasing rate, 9 The results of our calculations are shown in Table 1. For each set of parameter values, the coupon that values a twenty-year bond at par according to Eq. (2) is found and then used to calculate durations. To capture a range of possible settlement dates, the general duration measure (Eq. (3)) is calculated three times for s = 2, s = 1, and s = 0. The last two columns of Table 1 calculate two variations of the general duration measure: adjusted Macaulay (Eq. (4)), and the original Macaulay measure.