Corporate bonds: fixed versus stochastic coupons—an empirical study

Belal Ehsan Baaquie () and Muhammad Mahmudul Karim ()
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Belal Ehsan Baaquie: Advisor at Helixtap Technology
Muhammad Mahmudul Karim: University of Southampton Malaysia

Journal of Asset Management, 2024, vol. 25, issue 1, No 7, 113-128

Abstract: Abstract This paper studies a model proposed by Baaquie (Phys A Stat Mech Appl 541:123367, 2020b) for which a corporate bond pays coupons that are stochastic—depending on the valuation of the issuer. It is shown that by considering bonds with stochastic coupons that are ‘equivalent’ to fixed coupon bonds (defined in the paper), the price of the fixed coupon bond can be accurately explained. The proposed model of stochastic coupons has a built-in hedge for the issuer—and has the feature of profit and loss sharing between investor and issuer making it a viable instrument for Islamic finance.

Keywords: Corporate bond; Stochastic coupon; Hedge; Bond price; Islamic finance instrument (search for similar items in EconPapers)
JEL-codes: C02 C61 G12 G13 G15 G32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-023-00343-y

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