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Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

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Author Info
Hayne E. Leland.

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Abstract

This paper examines corporate debt values and capital structure in a unified analytical framework. It derives closed form results for the value of long-term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, riskfree interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds vs. investment grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.

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Publisher Info
Paper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number RPF-233.

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Date of creation: 01 Jan 1994
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Handle: RePEc:ucb:calbrf:rpf-233

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Postal: University of California at Berkeley, Berkeley, CA USA
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Web page: http://haas.berkeley.edu/finance/WP/rpflist.html
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Postal: IBER, F502 Haas Building, University of California at Berkeley, Berkeley CA 94720-1922
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This page was last updated on 2009-10-31.

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