Bond Pricing with Default Risk

Jason C. Hsu, Jesus Saa-Requejo and Pedro Santa-Clara

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We price corporate debt from a structural model of firm default. We assume that the capital market brings about efficient firm default when the continuation value of the firm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the model more tractable and parsimonious than the existing structural models. The model can be applied in conjunction with a broad range of default-free interest rate models to price corporate bonds. Closed-form corporate bond prices are derived for various parametric examples. The term structures of yield spreads and durations predicted by our model are consistent with the empirical literature. We illustrate the empirical performance of the model by pricing selected corporate bonds with varied credit ratings.

Date: 2003-09-01
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Citations: View citations in EconPapers (7)

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Working Paper: Bond Pricing with Default Risk (1997)
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