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A Simplified Firm Value-Based Risky Discount Bond Pricing Model

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  • 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.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 10 (2007)
Issue (Month): 03 ()
Pages: 445-468

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Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:03:p:445-468

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Related research

Keywords: Corporate bond; default risk; credit spread; JEL Classification: G12; JEL Classification: G13;

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