Valuing Euro Rating-Triggered Step-Up Telecom Bonds
AbstractWe 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-028/2.
Date of creation: 02 Apr 2003
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step-up bonds; Jarrow-Lando-Turnbull model; rating-based reduced form model; transition probabilities.;
Other versions of this item:
- Houweling, P. & Mentink, A.A. & Vorst, A.C.F., 2003. "Valuing Euro rating-triggered step-up telecom bonds," Econometric Institute Report EI 2003-50, Erasmus University Rotterdam, Econometric Institute.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-27 (All new papers)
- NEP-CFN-2003-04-27 (Corporate Finance)
- NEP-EEC-2003-04-27 (European Economics)
- NEP-RMG-2003-04-27 (Risk Management)
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- Gustavo Manso, 2011. "Feedback Effects of Credit Ratings," 2011 Meeting Papers 1338, Society for Economic Dynamics.
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