The Valuation of Corporate Coupon Bonds

35 Pages Posted: 27 Nov 2018 Last revised: 16 Mar 2020

See all articles by Jens Hilscher

Jens Hilscher

University of California, Davis

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Donald R. van Deventer

Kamakura Corporation

Date Written: March 12, 2020

Abstract

This paper proposes and estimates a tractable, arbitrage-free valuation model for corporate coupon bonds that includes a more realistic recovery rate process. The existing empirical literature uses a recovery rate process that is misspecified because it includes recovery rates for coupons due after default. Misspecification errors resulting from assuming recovery on all coupons can be substantial in size. They are larger if recovery rates, coupons, maturity and default probabilities are larger. We present evidence that coupon bond market transaction prices reflect the different recovery rates that our model predicts and that our model provides a good fit to market prices.

Keywords: corporate bonds, default probabilities, credit spreads, recovery rates

JEL Classification: G12

Suggested Citation

Hilscher, Jens and Jarrow, Robert A. and van Deventer, Donald R., The Valuation of Corporate Coupon Bonds (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3277092 or http://dx.doi.org/10.2139/ssrn.3277092

Jens Hilscher (Contact Author)

University of California, Davis ( email )

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Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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Donald R. Van Deventer

Kamakura Corporation ( email )

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