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A Model to Price Puttable Corporate Bonds with Default Risk

  • David Wang

    (Hsuan Chuang University)

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    This paper presents a model for pricing puttable corporate bonds that are subject to default risk. The model incorporates three essential ingredients in the pricing of defaultable puttable bonds: stochastic interest rate, default risk, and put provision. The stochastic interest rate is modeled as a square-root diffusion process. The default risk is modeled as a constant spread, with the magnitude of this spread impacting the probability of a Poisson process governing the arrival of the default event. The put provision is modeled as a constraint on the value of the bond in the finite difference scheme. This paper can be used both as a benchmark for models for pricing puttable corporate bonds that are subject to default risk and as a direction for future research.

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    Paper provided by EconWPA in its series Finance with number 0506014.

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    Length: 10 pages
    Date of creation: 22 Jun 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0506014
    Note: Type of Document - pdf; pages: 10
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