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On the Valuation and Analysis of Risky Debt: A Theoretical Approach Using a Multivariate Extension of the Merton Model

Author

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  • Edwin O. Fischer

    (Institute of Finance, Karl-Franzens-University Graz)

  • Lisa-Maria Kampl

    (Institute of Finance, University of Graz)

  • Ines Wöckl

    (Institute of Finance, University of Graz)

Abstract

We contribute to the literature on the valuation of risky debt by providing three nested multivariate extensions of the standard Merton model. First, we lay forth an approach to pricing risky debt irrespective of its interest payment structure and the specified redemption agreement. Second, we propose a technique for valuing multiple debt instruments within the same firm. Third, we provide an approach for pricing one or more debt instruments with continuous dividend payments.

Suggested Citation

  • Edwin O. Fischer & Lisa-Maria Kampl & Ines Wöckl, 2019. "On the Valuation and Analysis of Risky Debt: A Theoretical Approach Using a Multivariate Extension of the Merton Model," Working Paper Series, Social and Economic Sciences 2019-02, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
  • Handle: RePEc:grz:wpsses:2019-02
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    References listed on IDEAS

    as
    1. Geske, Robert & Johnson, H. E., 1984. "The Valuation of Corporate Liabilities as Compound Options: A Correction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(2), pages 231-232, June.
    2. 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.
    3. Edwin O. Fischer & Ines Wöckl, 2018. "When Do Loan and Bond Prepayments Pay Off?," Working Paper Series, Social and Economic Sciences 2018-02, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    4. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    5. 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.
    6. 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.
    7. Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 541-552, November.
    8. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    9. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
    10. Edwin O. Fischer & Lisa-Maria Kampl, 2018. "How to choose between fixed and variable rate loans," Working Paper Series, Social and Economic Sciences 2018-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
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    Cited by:

    1. Edwin O. Fischer & Lisa-Maria Kampl & Ines Wöckl, 2020. "On the Valuation and Analysis of Risky Debt: A Practical Approach Using Raging Migrations," Working Paper Series, Social and Economic Sciences 2020-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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