Factors Affecting the Valuation of Corporate Bonds

NYU Working Paper

44 Pages Posted: 12 Apr 2002

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Deepak Agrawal

KMV Corporation

Christopher Mann

Moody's Investors Service; Bank of Tokyo-Mitsubishi, Ltd.

Multiple version iconThere are 3 versions of this paper

Date Written: February 3, 2002

Abstract

The valuation of corporate debt is an important issue in asset pricing. While there has been an enormous amount of theoretical modeling of corporate bond prices, there has been relatively little empirical testing of these models. Recently there has been extensive development of rating based models as a type of reduced form model. These models take as a premise that groups of bonds can be identified which are homogeneous with respect to risk. For each risk group the models require estimates of several characteristics such as the spot yield curve, the default probabilities and the recovery rate. These estimates are then used to compute the theoretical price for each bond in the group. The purpose of this article is to clarify some of the differences among these models, to examine how well they explain prices, and to examine how to group bonds to most effectively estimate prices.

Keywords: debt, valuation

JEL Classification: G12

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Agrawal, Deepak and Mann, Christopher, Factors Affecting the Valuation of Corporate Bonds (February 3, 2002). NYU Working Paper. Available at SSRN: https://ssrn.com/abstract=307139 or http://dx.doi.org/10.2139/ssrn.307139

Edwin J. Elton

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

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber (Contact Author)

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

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Deepak Agrawal

KMV Corporation ( email )

1620 Montgomery Street
Suite 140
San Francisco, CA 94111
United States

Christopher Mann

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Bank of Tokyo-Mitsubishi, Ltd. ( email )

Japan

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