Valuing Euro rating-triggered step-up telecom bonds
AbstractWe value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando and Turnbull (1997, JLT) framework, (ii) a similar framework using historical probabilities and (iii) as plain vanilla bonds. We find that the market seems to value single step-up bonds according to the JLT model, while it values multiple step-up bonds as plain vanilla bonds. Further, step-up feature market premiums are more volatile than JLT and historical premiums, and the JLT model approximates market premiums always better than the historical method. Finally, most step-up bonds offer a cushion against rating migrations via dampened price movements.
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Bibliographic InfoPaper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 2003-50.
Date of creation: 07 Aug 2003
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Other versions of this item:
- Patrick Houweling & Albert Mentink & Ton Vorst, 2003. "Valuing Euro Rating-Triggered Step-Up Telecom Bonds," Tinbergen Institute Discussion Papers 03-028/2, Tinbergen Institute.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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- Gustavo Manso, 2011. "Feedback Effects of Credit Ratings," 2011 Meeting Papers 1338, Society for Economic Dynamics.
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