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Valuing Euro Rating-Triggered Step-Up Telecom Bonds


Author Info

  • Patrick Houweling

    (Faculty of Economics, Erasmus University Rotterdam)

  • Albert Mentink

    (Erasmus University Rotterdam, and Aegon Asset Management)

  • Ton Vorst

    (VU University Amsterdam)


We value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando andTurnbull (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 bondsaccording 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 pricemovements.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-028/2.

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Date of creation: 02 Apr 2003
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Handle: RePEc:dgr:uvatin:20030028

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Keywords: step-up bonds; Jarrow-Lando-Turnbull model; rating-based reduced form model; transition probabilities.;

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Cited by:
  1. Gustavo Manso, 2011. "Feedback Effects of Credit Ratings," 2011 Meeting Papers 1338, Society for Economic Dynamics.


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