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Pricing Corporate Securities as Contingent Claims

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  • Kenneth D. Garbade

    ()
    (Federal Reserve Bank of New York)

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    Abstract

    In 1973, Fischer Black, Myron Scholes, and Robert Merton pointed out that securities issued by a corporation can be priced as claims whose values are contingent on the value of the enterprise as a whole. The notion of treating corporate securities as contingent claims is intrinsically important, but it is also important because it integrates a variety of otherwise loosely related topics, including equity risk, credit risk, seniority and subordination, early redemption of callable debt, and conversion of convertible debt. Bringing together developments from the past thirty years in contingent valuation, this book examines the relative value of securities in a corporation's capital structure, including debt of different priorities, convertible debt, common stock, and warrants. The book emphasizes the importance of accounting for the institutional characteristics of default, bankruptcy, and voluntary recapitalization of a financially distressed firm, as well as the exercise of managerial discretion in calling debt for early redemption, servicing debt, paying dividends to common shareholders, and undertaking strategic actions such as leveraged recapitalizations and spin-offs.

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    Bibliographic Info

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    This book is provided by The MIT Press in its series MIT Press Books with number 0262072238 and published in 2001.

    Volume: 1
    Edition: 1
    ISBN: 0-262-07223-8
    Handle: RePEc:mtp:titles:0262072238

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    Web page: http://mitpress.mit.edu

    Related research

    Keywords: corporate security; leveraged recapitalization; convertible debt; common stock;

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    Cited by:
    1. M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007. "Global Business Cycles and Credit Risk," NBER Chapters, in: The Risks of Financial Institutions, pages 419-474 National Bureau of Economic Research, Inc.
    2. Samuel Hanson & M. Hashem Pesaran & Til Schuermann, 2005. "Firm Heterogeneity and Credit Risk Diversification," CESifo Working Paper Series 1531, CESifo Group Munich.
    3. Til Schuermann, 2005. "A review of recent books on credit risk," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(1), pages 123-130.

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