IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v15y2005i12p875-881.html
   My bibliography  Save this article

Equity and debt valuation with default risk: a discrete structural model

Author

Listed:
  • Marisa Cenci
  • Andrea Gheno

Abstract

Structural models' main source of uncertainty is the stochastic evolution of the firm's asset value. These models are commonly used to value corporate debt at the issue and hence to determine its yield given the amortization plan. This paper proposes two discrete models to value securities issued by a firm which can default before the maturity of its debt either for exogenous or endogenous causes. In either case the equity value is set as the price of a knock-out call option with a discrete monitoring barrier. The first model considers a debt refundable through the payment of known endowments and takes into account that the firm defaults as it fails to meet a promised payment. In the second model the firm's debt is made of a single issue of zero coupon bonds and includes the possibility that the firm defaults prior to the maturity of the debt if its asset value falls below a time dependent barrier. The particular evolution of the asset value, which shows discontinuity in the drift and diffusion coefficient, prevents the use of closed form solutions for options with a discrete monitoring barrier. The evaluation of the option is performed through non-recombining binomial trees.

Suggested Citation

  • Marisa Cenci & Andrea Gheno, 2005. "Equity and debt valuation with default risk: a discrete structural model," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 875-881.
  • Handle: RePEc:taf:apfiec:v:15:y:2005:i:12:p:875-881
    DOI: 10.1080/09603100500118849
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500118849
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Arianna Agosto & Enrico Moretto, 2010. "Applying default probabilities in an exponential barrier structural model," Economics and Quantitative Methods qf1005, Department of Economics, University of Insubria.
    2. Andrea Gheno, 2007. "Corporate valuations and the Merton model," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 47-50, January.

    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:taf:apfiec:v:15:y:2005:i:12:p:875-881. 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: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    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.