Extending the maturity of a defaulting debt - The longstaff model revisited
Journal
Review of Pacific Basin Financial Markets and Policies
Journal Volume
12
Journal Issue
1
Pages
125
Date Issued
2009-05-15
Author(s)
Chung, Yi Fang
Abstract
This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturity extension than before; (2) it recognizes that the risk profile of the firm substantially affects the strategic behavior of the creditor; and (3) it demonstrates that the higher the profit sharing percentage the creditor get, the more willing it will be to extend maturity. © 2009 World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research.
Subjects
Defaulting debt | Liquidation cost | Maturity extension decisions | Optimal extension period | Sharpe ratio
SDGs
Type
journal article