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The Valuation of Corporate Coupon Bonds

Author

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  • Hilscher, Jens
  • Jarrow, Robert A.
  • van Deventer, Donald R.

Abstract

This article proposes and estimates a tractable, arbitrage-free valuation model for corporate coupon bonds that includes a more realistic recovery rate process. Most existing studies use a recovery rate process that is misspecified because it includes recovery for coupons due after default. Misspecification errors from assuming recovery on all coupons can be substantial; they increase with recovery rates, coupons, maturity, and default probabilities. For a large sample of market transactions, i) our model has lower pricing errors than one assuming recovery on all coupons and ii) the magnitude of our model’s outperformance is linked to misspecification errors from assuming recovery on coupons.

Suggested Citation

  • Hilscher, Jens & Jarrow, Robert A. & van Deventer, Donald R., 2025. "The Valuation of Corporate Coupon Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(5), pages 2259-2292, August.
    • Handle: RePEc:cup:jfinqa:v:60:y:2025:i:5:p:2259-2292_6
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