Pricing corporate bonds with dynamic default barriers

Cho-Hoi Hui, Chi-Fai Lo and Shun-Wai Tsang

Journal of Risk

Abstract: ABSTRACT Merton-type models of pricing corporate bonds based on relatively simple default processes cannot generate credit spreads which replicate empirically observed spreads. This article presents an analytical valuation model of corporate discount bond prices to address this problem. The main feature of the model is a dynamic default barrier. Different default scenarios can be incorporated into the valuation model through adjusting the default barrier’s dynamics. We derive a closed-form solution of the corporate bond price based on the model as a function of the firm value and short-term interest rate, with time-dependent model parameters. The numerical results calculated from the solution show that the model is capable of producing term structures of credit spreads that are consistent with some empirical findings. This model could provide new insight for future research on corporate bond analysis and credit risk modeling.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-risk/2161099/pricing- ... mic-default-barriers (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:2161099

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine ().