Evaluating corporate bonds with complicated liability structures and bond provisions
Journal
European Journal of Operational Research
Journal Volume
237
Journal Issue
2
Pages
749-757
Date Issued
2014
Author(s)
Abstract
This paper presents a general and numerically accurate lattice methodology to price risky corporate bonds. It can handle complex default boundaries, discrete payments, various asset sales assumptions, and early redemption provisions for which closed-form solutions are unavailable. Furthermore, it can price a portfolio of bonds that accounts for their complex interaction, whereas traditional approaches can only price each bond individually or a small portfolio of highly simplistic bonds. Because of the generality and accuracy of our method, it is used to investigate how credit spreads are influenced by the bond provisions and the change in a firm's liability structure due to bond repayments.
Type
journal article