Valuation of Defaultable Bonds and Debt Restructuring

22 Pages Posted: 2 Mar 2002 Last revised: 14 May 2015

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2006

Abstract

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.

Keywords: Debt valuation, Defaultable bonds, Strategic contingent claim analysis, Modigliani-Miller theorem

JEL Classification: G13, G32, G33

Suggested Citation

Dumitrescu, Ariadna, Valuation of Defaultable Bonds and Debt Restructuring (July 1, 2006). Available at SSRN: https://ssrn.com/abstract=300655 or http://dx.doi.org/10.2139/ssrn.300655

Ariadna Dumitrescu (Contact Author)

ESADE Business School ( email )

Av. Pedralbes 60-62
Barcelona, 08034
Spain

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