Valuing Euro Rating-Triggered Step-Up Telecom Bonds

Patrick Houweling, Albert Mentink () and Ton Vorst ()
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Albert Mentink: Erasmus University Rotterdam, and Aegon Asset Management

No 03-028/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando andTurnbull (1997, JLT) framework, (ii) a similar framework using historical probabilities and(iii) as plain vanilla bonds. We find that the market seems to value single step-up bondsaccording to the JLT model, while it values multiple step-up bonds as plain vanilla bonds.Further, step-up feature market premiums are more volatile than JLT and historical premiums,and the JLT model approximates market premiums always better than the historical method.Finally, most step-up bonds offer a cushion against rating migrations via dampened pricemovements.

Keywords: step-up bonds; Jarrow-Lando-Turnbull model; rating-based reduced form model; transition probabilities. (search for similar items in EconPapers)
JEL-codes: C13 G12 (search for similar items in EconPapers)
Date: 2003-04-02
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Working Paper: Valuing Euro rating-triggered step-up telecom bonds (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20030028

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