Credit Ratings, Collateral and Loan Characteristics: Implications for Yield
47 Pages Posted: 21 Sep 2000
Date Written: January 2000
In this paper we study how collateral and loan characteristics can affect bond yields of debt. Using a large data set of all fixed rate straight debt public issues made in the period January 1, 1993 to March 31, 1995, we document that the yield on collateralized debt is higher than on general debt after controlling for credit rating. An explanation for this puzzling result is proposed that recognizes the effect of agency problems between managers and claimholders, and imperfections in the rating process. We then derive and test implications of the story. Consistent with this explanation, and in results new to empirical literature, the yield differential after controlling for credit rating, between secured and unsecured debt is found to be larger for low credit rating, nonmortgage assets, longer maturity and with proxies for lower levels of monitoring.
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