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On the Pricing of Defaultable Bonds Using the Framework of Barrier Options

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  • Motokazu Ishizaka
  • Koichiro Takaoka

Abstract

In the framework of the structural approach of bond pricing, we extend the Fujita–Ishizaka model by considering more realistic payoffs. The payoff to the bondholder at time of default, provided that default occurs prior to maturity, depends on the firm value at time of default. We also find the new measure with the advantage to calculate the value of bond and its financial interpretation. In addition, we present some numerical exmaples. Copyright Springer Science + Business Media, Inc. 2003

Suggested Citation

  • Motokazu Ishizaka & Koichiro Takaoka, 2003. "On the Pricing of Defaultable Bonds Using the Framework of Barrier Options," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 10(2), pages 151-162, September.
    • Handle: RePEc:kap:apfinm:v:10:y:2003:i:2:p:151-162
    DOI: 10.1007/s10690-005-6008-y
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    References listed on IDEAS

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    1. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    6. Fujita, Takahiko & 藤田, 岳彦 & Ishizaka, Motokazu & 石坂, 元一, 2002. "An Application of New Barrier Options (Edokko Options) for Pricing Bonds with Credit Risk," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 37(1), pages 17-23, October.
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    Cited by:

    1. Sukhomlin, Nikolay & Santana Jiménez, Lisette Josefina, 2010. "Problema de calibración de mercado y estructura implícita del modelo de bonos de Black-Cox = Market Calibration Problem and the Implied Structure of the Black-Cox Bond Model," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 10(1), pages 73-98, December.
    2. Takahiko Fujita & Masahiro Ishii, 2010. "Valuation of a Repriceable Executive Stock Option," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(1), pages 1-18, March.

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