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A note on the valuation of risky corporate bonds

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  • Schöbel, Rainer

Abstract

Simple formulas for the price of corporate discount and coupon bonds are found using the Longstaff and Schwartz valuation approach for the debt claims of a firm, where default is triggered by a special State variable: the firm's asset-to-debt-ratio. Instead of keeping the total amount of debt constant over time, it is shown that closed form solutions exist under the alternative assumption that the level of leverage is expected to remain constant over time under the risk-neutralized measure. This encourages a more conservative view on the capital structure policy of the firm which might be appropriate in case the firm is neither willing nor able to reduce its expected level of leverage considerably over time.

Suggested Citation

  • Schöbel, Rainer, 1997. "A note on the valuation of risky corporate bonds," Tübinger Diskussionsbeiträge 96, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:96
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    References listed on IDEAS

    as
    1. 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.
    2. Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-922, September.
    3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    4. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 109-126, March.
    5. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
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