A Note on Financial Frictions and Risky Corporate Debt in Relation to Cooley and Quadrini (2001)

Doriana Ruffino and Jonathan Treussard ()
Additional contact information
Jonathan Treussard: Boston University, Department of Economics

No WP2006-017, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We o¤er clari?cations on Cooley-Quadrini (2001) as regards ?nancial frictions and risky corporate-debt pricing. Even in a frictionless world, the promised rate on corpo- rate debt is not identical across ?rms and across capital structures and it is not equal to the risk-free market interest rate. Frictions are unnecessary for credit spreads to arise. Only with risk-neutrality at the macro-level do interest rates on corporate debt re?ect default-probabilities and in general, assuming that lenders set interest rates re- ?ecting their personal risk-neutrality systematically biases promised rates relative to market-based rates. To the extent that the ?rm?s entire ?nancial structure is traded in ?nancial markets, this bias introduces an exploitable arbitrage opportunity.

Pages: 12 pages
Date: 2006-03
References: View references in EconPapers View complete reference list from CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2006-017

Access Statistics for this paper

More papers in Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Program Coordinator ().