Bond prices in a debt priority structure with absolute priority rule deviation

We study the value of senior and junior bonds with random default and absolute priority rule violation and propose a simple approach to value risky bonds with varying parameters for the violation. Recognizing the sources of violation from equity contribution and value loss from challenges by junior...

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Bibliographic Details
Published inThe Quarterly review of economics and finance Vol. 47; no. 1; pp. 113 - 134
Main Authors Pyo, Unyong, Thompson, Howard E.
Format Journal Article
LanguageEnglish
Published Greenwich Elsevier Inc 01.03.2007
Elsevier
Elsevier Science Ltd
SeriesThe Quarterly Review of Economics and Finance
Subjects
Absolute priority rule
Bonds
Credit risk
Credit spreads
Random default
Recovery rate
Studies
Violations
Credit spreads
G12
Recovery rate
Absolute priority rule
Random default
G33
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Summary:We study the value of senior and junior bonds with random default and absolute priority rule violation and propose a simple approach to value risky bonds with varying parameters for the violation. Recognizing the sources of violation from equity contribution and value loss from challenges by junior bonds, we specify sharing rules among various claimants to the firm value and obtain the credit spreads of both senior and junior bonds from simulation. We find that the impact of one parameter on credit spreads depends on other parameters and those other parameters have to be considered simultaneously to price corporate bonds.
ISSN:1062-9769
1878-4259
DOI:10.1016/j.qref.2005.08.004