Credit risk analysis with creditor’s option to extend maturities

Ryoichi Ikeda () and Yoske Igarashi ()
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Ryoichi Ikeda: Nanzan University, School of Business Administration
Yoske Igarashi: The University of Exeter Business School

Annals of Finance, 2016, vol. 12, issue 3, No 1, 275-304

Abstract: Abstract We present a Merton (J Finance, 1974)-type structural model of credit risk in which the borrower firm refinances its debt, there is cost for bankruptcy, and the creditor has an option to extend the date of maturity of debt if the firm defaults. We show that a solution exists in such a model and in that solution the creditor has incentive to extend maturity to avoid bankruptcy cost. We solve the model numerically and argue that such maturity extension option for the creditor can have substantial impact on the debt and stock values of the firm.

Keywords: Structural model; Default; Bankruptcy cost; Maturity extension; Refinancing (search for similar items in EconPapers)
JEL-codes: G12 G13 G21 G33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-016-0281-9

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