Credit Ratings, Collateral and Loan Characteristics: Implications for Yield

47 Pages Posted: 21 Sep 2000

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Anthony W. Lynch

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Multiple version iconThere are 5 versions of this paper

Date Written: January 2000

Abstract

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.

Suggested Citation

John, Kose and Lynch, Anthony W. and Puri, Manju, Credit Ratings, Collateral and Loan Characteristics: Implications for Yield (January 2000). AFA 2001 New Orleans Meetings. Available at SSRN: https://ssrn.com/abstract=243182 or http://dx.doi.org/10.2139/ssrn.243182

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
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Anthony W. Lynch

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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(212) 995-4233 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Manju Puri

Duke University - Fuqua School of Business ( email )

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NBER

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FDIC ( email )

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