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The Optimal Term Structure of Debt Maturity

In: Bridging The Gaap Recent Advances in Finance and Accounting

Author

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  • Melissa Maisch
  • Fernando Zapatero

Abstract

We consider the problem of a debt issuer who has to issue a given amount of nominal debt and wants to minimize the (dis)utility resulting from the cost of debt. The debt issuer is risk-averse and has to decide an optimal mix of short-term bonds and long-term bonds. The optimization problem involves a trade-off between the fixed (but possibly high) rate of long-term bonds and the possibly low (but stochastic) rate of short-term bonds. We solve the problem numerically, using dynamic programming. We introduce an algorithm that greatly reduces the computational cost of the numerical procedure.

Suggested Citation

  • Melissa Maisch & Fernando Zapatero, 2012. "The Optimal Term Structure of Debt Maturity," World Scientific Book Chapters, in: Itzhak Venezia & Zvi Wiener (ed.), Bridging The Gaap Recent Advances in Finance and Accounting, chapter 10, pages 229-240, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814350013_0010
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