Sovereign Debt Maturity Structure and Dilution

Rajesh Singh and Mohammad Hasan

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The maturity structure of debt plays an important role in default probability and the resulting pricing of sovereign bonds. Using a calibrated model this paper shows that both the default probabilities and the prices get improved when the sovereign issues long-term bonds or both short- and long-term bonds instead of issuing only short-term bonds. This paper also shows that the inclusion of the compensation covenant mitigates the dilution problem of sovereign debt on a larger scale when the maturity of long-term bonds is sufficiently high.

Date: 2023-11-01
New Economics Papers: this item is included in nep-dge
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