Pricing An Interest Payment Guarantee: A Contribution to Debt Reduction Techniques

International Monetary Fund

No 1989/065, IMF Working Papers from International Monetary Fund

Abstract: This paper describes an approach for computing the market value of an interest guarantee on a bond where the principal is fully collateralized and which is exchanged for discounted sovereign debts. The cost of the insurance is determined on the basis of a simple option pricing model according to the theory of contingent claims. This method offers the advantage over previously proposed approaches by drawing a distinction between different classes of creditors that may wish to select different levels of insurance protection, recognizing thereby the leverage opportunities that arise from the existence of differing views on the credit risk of the sovereign borrower and different operational environments of the creditors.

Keywords: WP; price; put; bond; strike price; bond investor; price of the bond; call-put parity condition; bond issuer; cost of the insurance; Bonds; Asset prices; Options; Insurance; Securities; Global (search for similar items in EconPapers)
Pages: 28
Date: 1989-01-01
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