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Bond Pricing with Default Risk

  • Hsu, Jason C.
  • Saa-Requejo, Jesus
  • Santa-Clara, Pedro
Registered author(s):

    We price corporate debt from a structural model of ï¬rm default. We assume that the capital market brings about efficient ï¬rm default when the continuation value of the ï¬rm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the model more tractable and parsimonious than the existing structural models. The model can be applied in conjunction with a broad range of default-free interest rate models to price corporate bonds. Closed-form corporate bond prices are derived for various parametric examples. The term structures of yield spreads and durations predicted by our model are consistent with the empirical literature. We illustrate the empirical performance of the model by pricing selected corporate bonds with varied credit ratings.

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    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt5bb1j39q.

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    Date of creation: 01 Sep 2003
    Date of revision:
    Handle: RePEc:cdl:anderf:qt5bb1j39q
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    9. Ericsson, Jan & Reneby, Joel, 1995. "A Framework for Valuing Corporate Securities," SSE/EFI Working Paper Series in Economics and Finance 89, Stockholm School of Economics, revised Oct 1998.
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    19. 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.
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