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The pricing of total loss absorption capacity bonds in a jump-diffusion model with regime-switching

Author

Listed:
  • Wenyang Xu
  • Christian Oliver Ewald
  • Linjia Dong
  • Zhaojun Yang

Abstract

In corporate finance, we usually face the problem of pricing a type of asset, of which the cash flow is a linear function of the firm total cash flow up to the first time the latter exits from a given domain when their claimant receives a lump-sum payoff in addition. We call them standard assets. We provide a unified explicit pricing formula for all standard assets in a double-exponential jump-diffusion cash flow model with regime-switching. We explicitly derive prices of corporate securities involving recently introduced Total Loss Absorption Capacity (TLAC) Bonds in the mixed model. Our numerical analysis shows that the optimal coupon rate of TLAC bonds in the boom regime is substantially higher than that in the recession regime; thus, the firm should issue more TLAC bonds in a better economic environment.

Suggested Citation

  • Wenyang Xu & Christian Oliver Ewald & Linjia Dong & Zhaojun Yang, 2025. "The pricing of total loss absorption capacity bonds in a jump-diffusion model with regime-switching," Quantitative Finance, Taylor & Francis Journals, vol. 25(12), pages 1921-1938, December.
    • Handle: RePEc:taf:quantf:v:25:y:2025:i:12:p:1921-1938
    DOI: 10.1080/14697688.2025.2571150
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