Optimal Capital Structure and the Term Structure of Interest Rates

Xin Wang and Chris Downing ()
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Chris Downing: Economics Rice University

No 38, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: In this paper we study corporate debt values, capital structure, and the term structure of interest rates in a unified framework. We employ numerical techniques to compute the firm's optimal capital structure and the value of its long-term risky debt and yield spreads when the value of the firm's unleveraged assets and the instantaneous default-free interest rate are risk factors. Debt and leveraged firm value are thus explicitly linked to properties of the firm's unleveraged assets, the term structure of default-free interest rates, taxes, bankruptcy costs, payout rates, and bond covenants. The results clarify the relationship between a firm's capital structure and movements in the term structure and other important aspects of the capital structure decision

Keywords: Capital Structure; Term Structure; Parallel Processing (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-fin
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:38

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