Evaluating corporate bonds with complicated liability structures and bond provisions |
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| Authors: | Chuan-Ju Wang Tian-Shyr Dai Yuh-Dauh Lyuu |
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| Institution: | 1. Department of Computer Science, University of Taipei, No. 1, Aiguo W. Rd., Taipei 100, Taiwan;2. Department of Information and Finance Management, Institute of Information Management and Institute of Finance, National Chiao Tung University, 1001 Ta Hsueh Road, Hsinchu 300, Taiwan;3. Department of Finance and Department of Computer Science & Information Engineering, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei 106, Taiwan |
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| 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. |
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| Keywords: | Pricing Credit risk Structural model Default |
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