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A Simplified Firm Value-Based Risky Discount Bond Pricing Model

Author

Listed:
  • Alan T. Wang

    (Graduate Institute of Finance & Banking, National Cheng Kung University, Tainan 701, Taiwan)

  • Sheng-Yung Yang

    (Department of Finance, National Chung Hsing University, Taichung 402, Taiwan)

Abstract

This paper proposes a simplified risky discount bond pricing model based on Longstaff and Schwartz (1995). The advantage of this model is that it yields a closed form solution for probability of default. Also, a practical feature with our model is that computing durations and other risk management tools become computationally less expensive, while the appealing properties in the LS model are preserved. The numerical comparisons show that the differences in credit spreads between this model and Longstaff and Schwartz are within a few basis points for fairly general parameter values. Moreover, the computational time is shown remarkably reduced by the simplified model. Sensitivity analysis of credit spread with respect to different parameter values is presented.

Suggested Citation

  • Alan T. Wang & Sheng-Yung Yang, 2007. "A Simplified Firm Value-Based Risky Discount Bond Pricing Model," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 445-468.
    • Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:03:n:s0219091507001148
    DOI: 10.1142/S0219091507001148
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    Citations

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    Cited by:

    1. Oleg Sokolinskiy, 2019. "Debt rollover-induced local volatility model," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1065-1084, May.
    2. Tsung-Kang Chen & Hsien-Hsing Liao & Chia-Wu Lu, 2011. "A flow-based corporate credit model," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 517-532, May.
    3. Christian Koziol, 2014. "A simple correction of the WACC discount rate for default risk and bankruptcy costs," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 653-666, May.

    More about this item

    Keywords

    Corporate bond; default risk; credit spread; JEL Classification: G12; JEL Classification: G13;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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