Credit Ratings, Collateral and Loan Characteristics: Implications for Yield

59 Pages Posted: 19 Dec 2003

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

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Abstract

This paper studies how collateral affects bond yields. Using a large dataset of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claimholders explains this puzzling result by recognizing imperfections in the rating process. We test the model's implications. Consistent with our model and in results new to the literature, we find the yield differential between secured and unsecured debt, after controlling for credit rating, is larger for low credit rating, nonmortgage assets, longer maturity and with proxies for lower levels of monitoring.

JEL Classification: G2, G3

Suggested Citation

John, Kose and Lynch, Anthony W. and Puri, Manju, Credit Ratings, Collateral and Loan Characteristics: Implications for Yield. Available at SSRN: https://ssrn.com/abstract=316706 or http://dx.doi.org/10.2139/ssrn.316706

Kose John

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Anthony W. Lynch

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
(212) 998-0350 (Phone)
(212) 995-4233 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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