A Model to Price Puttable Corporate Bonds with Default Risk

David Wang
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David Wang: Hsuan Chuang University

Finance from EconWPA

Abstract: 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.

Keywords: Default Risk; Puttable Bond (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2005-06-22
Note: Type of Document - pdf; pages: 10

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0506014

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