IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v32y1997i02p239-248_00.html
   My bibliography  Save this article

Valuing Risky Fixed Rate Debt: An Extension

Author

Listed:
  • Briys, Eric
  • de Varenne, François

Abstract

This paper develops a corporate bond valuation model that takes into account both early default and interest rate risk. It corrects a defect of recent contributions where pricing equations do not assure that the payment to bondholders upon bankruptcy is no greater than firm value. The bankruptcy-triggering mechanism is directly related to the payoff received by bondholders when early bankruptcy is forced upon the firm. More specifically, the default barrier is defined simply as a fixed quantity discounted at the riskless rate up to the maturity date of the risky corporate bond. As soon as this threshold is crossed, bondholders receive an exogenously specified fraction of the remaining assets. Deviations from the absolute priority rule also are captured. Because it accounts for Gaussian interest rate uncertainty, default risk, and deviations from the absolute priority rule, this model is capable of producing quite diverse shapes for the term structure of yield spreads.

Suggested Citation

  • Briys, Eric & de Varenne, François, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June.
  • Handle: RePEc:cup:jfinqa:v:32:y:1997:i:02:p:239-248_00
    as

    Download full text from publisher

    File URL: http://journals.cambridge.org/abstract_S002210900000082X
    File Function: link to article abstract page
    Download Restriction: no

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:32:y:1997:i:02:p:239-248_00. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: http://journals.cambridge.org/jid_JFQ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.