A strategic analysis of sinking fund bonds

Unlike most securities, the pricing of sinking fund bonds is influenced by the distribution of ownership, which summarizes the extent to which the market is cornered. The effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor's position. This framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt. We show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds.     

FINANCING INNOVATIONS AND CAPITAL STRUCTURE CHOICES

The last two decades have seen a stream of innovation in financial markets, especially in corporate bonds. Some of these innovations—notably, hybrid debt—have provided firms with more flexibility in designing cash flows on borrowings, allowing them to match cash flows on financing more closely to cash flows on assets. In so doing, the use of such innovative securities has increased corporate debt capacity and hence firm value.
But if such changes have been mostly good news for corporate treasurers, the relentless torrent of innovation has sometimes resulted in firms issuing these new securities for the wrong reasons. Some have done so to take advantage of loopholes in the way ratings agencies and regulatory agencies define debt and equity—and others to exploit perceived pricing anomalies—without considering the effect of such securities on the firm's overall risk profile. In this context, it is worth noting that as corporate bonds have become more complex, investment bankers have made themselves indispensable to the process by providing pricing as well as selling support. This article aims to help managers distinguish when financing with complex securities serves their company's interests, and when it can end up hurting them.     

Banks,firms and the relative pricing of tax-exempt and taxable bonds

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models.     

地方政府隐性债务与城投债定价

由于1994年《预算法》限制了中国地方政府凭借自身信用发行政府债券的能力,地方政府通过设立融资平台的方式发行了大量城投债券。虽然城投债被普遍认为是含有政府隐性担保的,但隐性担保主体认定尚未有共识。本文通过加总地方政府下属融资平台有息债务总额的方法,构建地方政府隐性债务负担率指标,并通过分析地方政府隐性债务负担率对城投债一二级市场信用利差的影响,进一步探索市场对城投债隐性担保责任主体的认定。研究发现,政府隐性债务负担率高的地方城投债信用利差偏高,并且这种影响随政策以及宏观形势而变化。自滇公路违约函事件后,投资者在城投债定价中开始普遍关注地方政府隐性债务负担率的信息;而在43号文明确了地方政府债务置换措施后,省级政府的隐性债务负担率开始成为城投债定价的重要影响因素。这说明投资者认可的地方隐性担保的责任主体是随时间变动的。     

The Default Premium and Corporate Bond Experience

The development of organized markets for speculative-grade corporate debt has provided financial researchers with an opportunity to examine the pricing of default risk. By incorporating previous work on the default experience of low-rated corporate debt, this paper presents an introduction to risk-neutral models of risky-bond pricing and uses these to examine the relationship between the default premium embodied in bond yields and actual default rates. The contribution of macroeconomic information to the default premium is also examined. The author finds that holders of low-grade bonds have, on average, been compensated for losses due to default.     

A Markov model for the term structure of credit risk spreads

This article provides a Markov model for the term structureof credit risk spreads. The model is based on Jarrow and Turnbull(1995), with the bankruptcy process following a discrete statespace Markov chain in credit ratings. The parameters of thisprocess are easily estimated using observable data. This modelis useful for pricing and hedging corporate debt with imbeddedoptions, for pricing and hedging OTC derivatives with counterpartyrisk, for pricing and hedging (foreign) government bonds subjectto default risk (e.g., municipal bonds), for pricing and hedgingcredit derivatives, and for risk management.     

Spanish Treasury bond market liquidity and volatility pre- and post-European Monetary Union

Spain enacted a number of important debt management initiatives in 1997 to prepare its Treasury bond market for European Monetary Union. We interpret the impacts of these changes through shifts in a bond liquidity “life cycle” function. Furthermore, we highlight the importance of expected average future liquidity in explaining Spanish bond liquidity premiums. We also uncover pricing biases that support the Spanish Treasury’s tactical decision to target high-coupon, premium bonds in its pre-EMU debt exchanges. Finally, we show that EMU has been associated with both a decrease in bond yield volatility and an increase in pricing efficiency.     

Valuation of defaultable bonds and debt restructuring

In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.     

Risky Debt,Investment Incentives,and Reputation in a Sequential Equilibrium

The agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information. The incentive effect of risky debt on the investment policy of a levered firm is studied in this context. In a sequential equilibrium of the model, a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment. The incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market. This anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium. Some empirical implications of the model for bond rating, debt covenants, and bond price response to investment announcements are explored.     

A comparison of Merton's option pricing model of corporate debt valuation to the use of book values

Many studies use the book value of debt as a proxy for its market value because most corporate debt does not trade. I call this practice the book value of debt (BVD) approximation, and it appears to be justified by the observation that the average market value of debt is close to its book value. Many corporate bonds, however, trade at values significantly different from their book values, and consequently the BVD approximation can create important biases. I compare the accuracy of the BVD approximation to Merton's option pricing (OPT) model of corporate debt valuation, and find consistent evidence that the Merton model provides more accurate estimates. I also show that this model is an easily estimated alternative to the BVD approximation. In short, the BVD approximation not only creates significant biases, but it is also an unnecessary simplification.