The Optimal Term Structure of Debt Maturity

Melissa Maisch and Fernando Zapatero

Chapter 10 in Bridging the GAAP:Recent Advances in Finance and Accounting, 2012, pp 229-240 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe consider the problem of a debt issuer who has to issue a given amount of nominal debt and wants to minimize the (dis)utility resulting from the cost of debt. The debt issuer is risk-averse and has to decide an optimal mix of short-term bonds and long-term bonds. The optimization problem involves a trade-off between the fixed (but possibly high) rate of long-term bonds and the possibly low (but stochastic) rate of short-term bonds. We solve the problem numerically, using dynamic programming. We introduce an algorithm that greatly reduces the computational cost of the numerical procedure.

Keywords: Finance; Accounting; Fair Value; Asset Prices; Options; Capital Structure; Debt; Inventory; Leverage; Incentive; Specialists; Generally Accepted Accounting Principles (GAAP) (search for similar items in EconPapers)
Date: 2012
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