Analytical pricing of defaultable discrete coupon bonds in unified two-factor model of structural and reduced form models

Pricing formulae for defaultable corporate bonds with discrete coupons (under consideration of the government taxes) in the united two-factor model of structural and reduced form models are provided. The aim of this paper is to generalize the two-factor structural model for defaultable corporate discrete coupon bonds (considered in 1]) into the unified model of structural and reduced form models. In our model the bond holders receive the stochastic coupon (which is the discounted value of a predetermined value at the maturity) at predetermined coupon dates and the face value (debt) and the coupon at the maturity as well as the effect of government taxes which are paid on the proceeds of an investment in bonds is considered. The expected default event occurs when the equity value is not sufficient to pay coupon or debt at the coupon dates or maturity and the unexpected default event can occur at the first jump time of a Poisson process with the given default intensity provided by a step function of time variable. We provide the model and pricing formula for equity value and using it calculate expected default barrier. Then we provide pricing model and formula for defaultable corporate bonds with discrete coupons and consider its duration.