Pricing Defaultable Bonds under the Protection of Bankruptcy Law
Date Issued
2006
Date
2006
Author(s)
Song, Fang-Hua
DOI
zh-TW
Abstract
From October 17, 2005, U.S.A. put new bankruptcy law into practice. The largest difference between new bankruptcy law and old bankruptcy law is limiting automatic-stay to 18 months. When we price defaultable bonds, we must think of the protection of new bankruptcy law. Longstaff and Schwartz (1995) is the fundamental framework employed in this article to consider the bond pricing problem incorporating default. Taking the protection of bankruptcy law into consideration, we divide recovery rate into recovery rate of successful reorganization and recovery rate of un-successful reorganization.
We find out the pricing model of known defaultable bonds. Therefore, we add the protection of bankruptcy law adjustments into the pricing model of corporate bonds.
In the pricing model of known defaultable bonds, we can find different recovery rate of successful reorganization and recovery rate of un-successful reorganization could form the same recovery rate. Because recovery rate of successful reorganization is drawn up by negotiation between bond holder and creditor, we find that bond holder can choose appropriate recovery rate of successful reorganization in accordance with his risk preference.
We also loosen the restriction of receiving fractional principal at maturity. We assume bond holder can receive fractional principal at 1.5 years after the event of a default. We find that bond price of short maturity in our model is lower than in LS model and bond price of long maturity in our model is higher than in LS model.
We have not tried to model the complex bargaining process among automatic-stay period. In the end, we can incorporate bargaining process to let the model more complete.
Subjects
破產法
破產重整
違約回收率
Bankruptcy Law
CH 11 Reorganization
Recovery Rate
Type
thesis
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