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The Valuation of Corporate Fixed Income Securities

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  • In Joon Kim
  • Krishna Ramaswamy
  • Suresh Sundaresan
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    Abstract

    We develop contingent claims valuation models for corporate bonds that are capable of generating yield spreads consistent with the levels observed in practice. We incorporate important features in the valuation related to the occurrence of and payoff upon bankruptcy and focus on the default risk of coupons in the presence of dividends and interest rate uncertainty. Numerical solutions are employed to show that the resulting yield spreads are sensitive to interest rate expectations but not to the volatility of the interest rates. Interaction between call provisions and default risk in determining yield spreads is explicitly analyzed to show that the call provision has a differential effect on Treasury issues relative to corporate issues.

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    Bibliographic Info

    Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 32-89.

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    Handle: RePEc:fth:pennfi:32-89

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    Cited by:
    1. Chau-Jung Kuo & Chin-Ming Chen & Chao-Hsien Sung, 2011. "Evaluating guarantee fees for loans to small and medium-sized enterprises," Small Business Economics, Springer, vol. 37(2), pages 205-218, September.
    2. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "A Direct Approach to Arbitrage-Free Pricing of Derivatives," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-013, New York University, Leonard N. Stern School of Business-.
    3. Acharya, Viral V & Das, Sanjiv Ranjan & Sundaram, Rangarajan K, 2002. "Pricing Credit Derivatives with Rating Transitions," CEPR Discussion Papers 3329, C.E.P.R. Discussion Papers.

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