A sequential pricing framework for corporate securities: The case of rating-trigger step-up/-down bonds

Matthias Bank and Alexander Kupfer

Finance Research Letters, 2014, vol. 11, issue 4, 437-445

Abstract: We develop a sequential pricing framework in a continuous time cash flow model allowing for repeated valuation of different cash flow claims. One claim is valued until a prespecified boundary is hit, which is subsequently used as the new valuation starting point for the next claim. This highly flexible pricing framework is applied to the pricing of rating-trigger step-up/-down corporate bonds, the coupon payments of which depend on the issuing company’s credit rating. We present a simple closed-form pricing solution for this type of bonds including both a step-up and step-down threshold, as well as a lower default boundary.

Keywords: Rating-trigger step-up/-down bonds; Performance-sensitive bonds; Performance-sensitive debt; Sequential pricing (search for similar items in EconPapers)
JEL-codes: G13 G24 G30 G34 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:4:p:437-445

DOI: 10.1016/j.frl.2014.07.005

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