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Valuing Defaultable Bonds
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Book Synopsis First Passage and Excursion Time Models for Valuing Defaultable Bonds by : Martina Nardon
Download or read book First Passage and Excursion Time Models for Valuing Defaultable Bonds written by Martina Nardon and published by . This book was released on 2009 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this contribution, we study structural models of defaultable bond pricing in which default occurs at the first time a relevant process either reaches the default boundary or has spent continuously (or cumulatively) a fixed time period below that threshold. Unlike first-passage time approaches, excursion time models allow for a non-absorbing state of default. Both the first-passage time and the excursion time approaches can be generalized by defining the default time as the first instant at which the firm value process (or another signaling process) either remains a certain time below the default threshold or hits a lower barrier. This corresponds, for instance, to a situation in which a firm is allowed temporarily to be short of funds, but enters default immediately when the financial distress becomes severe. Moreover, we examine the effects of different default time specifications on bond prices and credit spreads.
Book Synopsis Valuing Defaultable Bonds by : Martina Nardon
Download or read book Valuing Defaultable Bonds written by Martina Nardon and published by . This book was released on 2009 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical threshold. In the excursion approach the duration of default, the time period from the financial distress announcement through its resolution, is explicitly modeled. In this contribution, we provide a review of the literature on excursion time models of credit risk. Moreover, we examine the effects on credit spreads structure of different specifications of the event that triggers default.
Book Synopsis Defaultable Bonds and Credit Derivatives by : Daniel L. Chertok
Download or read book Defaultable Bonds and Credit Derivatives written by Daniel L. Chertok and published by . This book was released on 2010 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper surveys the most common models and methodologies for valuing defaultable bonds and credit derivatives. Structural and reduced-form pricing models are discussed and credit modelling methodologies are compared with respect to their applicability to defaultable asset classes.
Book Synopsis A Jump-diffusion Approach to Modeling Credit Risk and Valuing Defaultable Securities by : Chunsheng Zhou
Download or read book A Jump-diffusion Approach to Modeling Credit Risk and Valuing Defaultable Securities written by Chunsheng Zhou and published by . This book was released on 1997 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Interest Rate Risk Modeling by : Sanjay K. Nawalkha
Download or read book Interest Rate Risk Modeling written by Sanjay K. Nawalkha and published by John Wiley & Sons. This book was released on 2005-05-31 with total page 429 pages. Available in PDF, EPUB and Kindle. Book excerpt: The definitive guide to fixed income valuation and risk analysis The Trilogy in Fixed Income Valuation and Risk Analysis comprehensively covers the most definitive work on interest rate risk, term structure analysis, and credit risk. The first book on interest rate risk modeling examines virtually every well-known IRR model used for pricing and risk analysis of various fixed income securities and their derivatives. The companion CD-ROM contain numerous formulas and programming tools that allow readers to better model risk and value fixed income securities. This comprehensive resource provides readers with the hands-on information and software needed to succeed in this financial arena.
Book Synopsis Valuation of Defaultable Bonds and Debt Restructuring by : Ariadna Dumitrescu
Download or read book Valuation of Defaultable Bonds and Debt Restructuring written by Ariadna Dumitrescu and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.
Book Synopsis Valuation Model of Defaultable Bond Values in Emerging Markets by : Cho-Hoi Hui
Download or read book Valuation Model of Defaultable Bond Values in Emerging Markets written by Cho-Hoi Hui and published by . This book was released on 2007 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a model to value defaultable bonds in emerging markets. Default occurs when some signaling process hits a pre-defined default barrier. The signaling variable is considered to be some macro-economic variables such as foreign exchange rates. The dynamics of the default barrier depends on the volatility and the drift of the signaling variable. We derive a closed-form solution of the defaultable bond price from the model as a function of a signaling variable and a short-term interest rate. The numerical results show that the model values generated by using foreign exchange rates as the signaling variables can broadly track the market credit spreads of defaultable bonds in South Korea and Brazil. Given an expected level of the foreign exchange rate, defaultable bond values under stressed market situation can be obtained.
Book Synopsis Corporate Bonds by : Viral V. Acharya
Download or read book Corporate Bonds written by Viral V. Acharya and published by . This book was released on 2008 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the valuation and risk management of callable, defaultable bonds when both interest rates and firm value are stochastic and when the issuer follows optimal call and default policies. Since interest rate sensitivity is low when call is imminent and firm value sensitivity is high when default is imminent, characterizing the issuer's call and default policies is essential to understanding corporate bond risk management. We develop analytical results on optimal call and default rules and use them to explain the dynamics of a hedging strategy for corporate bonds using Treasury bonds and issuer equity.To clarify the interaction between the issuer's embedded call and default options, we compare the callable defaultable bond to its pure callable and pure defaultable counterparts. Each bond's embedded option is a call on a riskless, noncallable host bond, distinguished only by its strike price. This generalized call option perspective generates intuition for a variety of results. For instance, spreads on all bonds, not just callables, narrow with interest rates; a decline in rates can trigger a default; a call provision can increase the duration of a risky bond; a call provision increases equity's sensitivity to firm value, mitigating the underinvestment problem identified by Myers (1977).
Book Synopsis Callable Defaultable Bonds by : Jennifer N. Carpenter
Download or read book Callable Defaultable Bonds written by Jennifer N. Carpenter and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper models callable defaultable bonds, incorporating both stochastic interest rates and optimal call and default rules. We provide analytical results about valuation and optimal exercise boundaries, which we use to study hedge ratios with respect to Treasury bonds and issuer equity. Since the interest rate and equity risk of a bond depend on how close it is to call or default, the results on optimal exercise boundaries lead to newinsights about durations, betas, and hedge ratios. For example, as functions of firm value, bond deltas with respect to the Treasury bond essentially inherit the shape of the exercise boundaries. It follows that a call provision can increase the duration of a defaultable bond and default risk can increase the duration of a callable bond. We also illustrate the difficulty of hedging default risk and quantify the Myers underinvestmentproblem for typical high grade and junk bond issuers.
Book Synopsis Defaultable Bonds and Default Correlation by : Lara Cathcart
Download or read book Defaultable Bonds and Default Correlation written by Lara Cathcart and published by . This book was released on 2003 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a closed form solution for the pricing of defaultable bonds and default correlation. In a stochastic interest rates framework default occurs when the value of the assets of the firm either hits a stochastic boundary of default or according to a stochastic hazard rate. The model combines the advantages of structural and reduced form models and thus generates credit spreads and default correlations consistent with empirical observation.
Book Synopsis An Exact Formula for Pricing Defaultable Bonds by : Chebbi Tarek
Download or read book An Exact Formula for Pricing Defaultable Bonds written by Chebbi Tarek and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives a closed-form solution for pricing defaultable bonds by replacing numerical inversion of Laplace transformation proposed by Cathcart and El-Jahel (1998). Note here that in the in-between approach, the signaling variable (i.e., the default event process) and the interest rates are independent. Hence, the forward-neutral and the risk-neutral default probabilities are the same. Furthermore, since default event is described by the first hitting time of a geometric Brownian motion to a fixed barrier, the forward-neutral default probability admits an analytical solution. The construction has a simple and intuitive economic interpretation and essentially may improve the structural approach performance. The paper provides quantitative guidance to practitioners who use default probabilities in market asset valuation.
Book Synopsis Modeling Term Structures of Defaultable Bond by : Darrell Duffie
Download or read book Modeling Term Structures of Defaultable Bond written by Darrell Duffie and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents convenient reduced-form models of the valuation of contingent claims subject to default. A distinguishing feature of our approach is that losses at default are parameterized in terms of the fractional loss in market value. Under this assumption, and the assumption that default is an unpredictable event governed by a hazard-rate process, we show that many defaultable claims can be priced as if they are default-free by replacing the usual riskless discount rate by a default-adjusted short-rate process. This pricing framework is applied to callable and non-callable corporate bonds and a credit spread option. Additionally, we compare the pricing implications of models with fractional recovery of market value and fractional recovery of par upon default.
Book Synopsis Pricing Bonds and Bond Options with Default Risk by : Emilio Barone
Download or read book Pricing Bonds and Bond Options with Default Risk written by Emilio Barone and published by . This book was released on 2004 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: The pricing of bonds and bond options with default risk is analyzed in the general equilibrium model of Cox, Ingersoll, and Ross (Cir, 1985). This model is extended by means of an additional parameter in order to deal with financial and credit risk simultaneously. The estimation of such a parameter, which can be considered as the market equivalent of an agencies' bond rating, allows to extract from current quotes the market perceptions of firm's credit risk. The general pricing model for defaultable zero-coupon bond is derived in a simple discrete-time setting while a more rigorous treatment, in a continuous-time setting, is contained in the Appendix A. Defaultable bonds may be valued by discounting the promised terminal payoff at a default-risk-adjusted interest rate, i.e. the risk-free rate plus a default-risk premium, or by discounting the expected terminal payoff at a risk-free interest rate. The availability of an integrated model allows for the pricing of default-free options written on defaultable bonds and of vulnerable options written either on default-free bonds or defaultable bonds. Valuation is performed under different contractual provisions dealing with the event of default: their impact on options prices is investigated and several numerical examples are given. A comparison between our results and those given by Jarrow and Turnbull (1995) is also presented.
Book Synopsis A New Concept of Credit Spread for Defaultable Bond Pricing by : Yunkang Liu
Download or read book A New Concept of Credit Spread for Defaultable Bond Pricing written by Yunkang Liu and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: A new concept of credit spread for defaultable bond pricing is introduced in this paper. When combined with the corresponding survival-based pricing model, it allows fixed income portfolio consists of bonds and credit default swaps to be managed consistently in terms of default and credit spread risks. Compared with industry standard credit spreads such as yield spread, G-spread and I-spread, the new credit spread provides a better way for market participants to exchange pricing information since spread differentials between bonds with similar maturities but different coupons can be reduced or better explained. For market participants using industry standard credit spreads, a model based spread adjustment between bonds with similar maturities but different coupons is discussed. Formulae that are suitable for back-of-the-envelop calculation are derived and tested with examples.
Book Synopsis Sovereign Default Risk Valuation by : Jochen Andritzky
Download or read book Sovereign Default Risk Valuation written by Jochen Andritzky and published by Springer Science & Business Media. This book was released on 2006-11-23 with total page 261 pages. Available in PDF, EPUB and Kindle. Book excerpt: Past cycles of sovereign lending and default suggest that debt crises will recur at some point. This book shows why investors should reckon with similar credit events in the future. Surveying the sovereign bond market, the author provides investors with a useful toolkit for analyzing sovereign bonds and foreseeing trends in the international financial architecture. The result should be a better understanding of debt crises and more deliberate investment decisions.
Book Synopsis Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy by : Viral V. Acharya
Download or read book Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy written by Viral V. Acharya and published by . This book was released on 2002 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Valuation of Default Risk in Corporate Bonds and Interest Rate Swaps by : Soren S. Nielsen
Download or read book The Valuation of Default Risk in Corporate Bonds and Interest Rate Swaps written by Soren S. Nielsen and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper implements a model for the valuation of the default risk implicit in the prices of corporate bonds and interest rate swaps. The analytical approach considers the two essential ingredients in the valuation of corporate bonds: interest rate uncertainty and default risk. The former is modeled as a diffusion process. The latter is modeled as a spread following a diffusion process, with the magnitude of this spread impacting on the probability of a Poisson process governing the arrival of the default event. We apply two variants of this model to the valuation of fixed-for-floating swaps. In the first, the swap is default-free, and the spread represents the appropriate discounted expected value of the instantaneous TED spread; in the second, we allow the swap to incorporate default risk. We test our models using the entire term structure of corporate bond prices for different ratings and industry categories, as well as the term structure of fixed-for-floating swaps.
