Evaluating corporate bonds with complicated liability structures and bond provisions

Chuan-Ju Wang, Tian-Shyr Dai and Yuh-Dauh Lyuu

European Journal of Operational Research, 2014, vol. 237, issue 2, 749-757

Abstract: This paper presents a general and numerically accurate lattice methodology to price risky corporate bonds. It can handle complex default boundaries, discrete payments, various asset sales assumptions, and early redemption provisions for which closed-form solutions are unavailable. Furthermore, it can price a portfolio of bonds that accounts for their complex interaction, whereas traditional approaches can only price each bond individually or a small portfolio of highly simplistic bonds. Because of the generality and accuracy of our method, it is used to investigate how credit spreads are influenced by the bond provisions and the change in a firm’s liability structure due to bond repayments.

Keywords: Pricing; Credit risk; Structural model; Default (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:237:y:2014:i:2:p:749-757

DOI: 10.1016/j.ejor.2014.02.024

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