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Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield

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Author Info
Kose John (New York University)
Anthony W. Lynch (New York University and National Bureau of Economic Research)
Manju Puri (Stanford University and National Bureau of Economic Research)
Abstract

This article studies how collateral affects bond yields. Using a large data set of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claim holders explains this puzzling result by recognizing imperfections in the rating process. We test the model's implications. Consistent with our model and in results new to the literature, we find the yield differential between secured and unsecured debt, after controlling for credit rating, is larger for low credit rating, nonmortgage assets, longer maturity, and with proxies for lower levels of monitoring.

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File URL: http://www.journals.uchicago.edu//cgi-bin/resolve?JB760301
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 76 (2003)
Issue (Month): 3 (July)
Pages: 371-410
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ucp:jnlbus:v:76:y:2003:i:3:p:371-410

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  1. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Maciej Firla-Cuchra, 2005. "Explaining Launch Spreads on Structured Bonds," Economics Series Working Papers 230, University of Oxford, Department of Economics. [Downloadable!]
  3. Giorgio Calcagnini & Fabio Farabullini & Germana Giombini, 2009. "Loans, Interest Rates and Guarantees: Is There a Link?," Working Papers 0904, University of Urbino Carlo Bo, Department of Economics, revised 2009. [Downloadable!]
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This page was last updated on 2009-12-2.

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