What Determines Debt Maturity?

93 Pages Posted: 6 Dec 2019

See all articles by Rodolfo Manuelli

Rodolfo Manuelli

Washington University in St. Louis

Date Written: 2019


What determines the maturity structure of debt? In this article, I develop a simple model to explore how the optimal maturity of debt issued by a firm (or a country) depends both on the firm’s cyclical state and other features of the economic environment in which it operates. I find that firms with better current earnings and better growth prospects issue debt with longer maturity, while firms operating in more-volatile environments issue debt with shorter maturity. Yield to maturity is a poor indicator of the risk of debt issued by a firm. The reason is simple: Yield to maturity captures both default risk and a component that is a pseudo term premium. In the model, the market does require a term premium and one appears only because of the risk of default. It is not possible to separate the impact of maturity and risk.

JEL Classification: G12, G30

Suggested Citation

Manuelli, Rodolfo, What Determines Debt Maturity? (2019). Review, Vol. 101, Issue 3, pp. 155-176, 2019, Available at SSRN: https://ssrn.com/abstract=3494162 or http://dx.doi.org/10.20955/r.101.155-76

Rodolfo Manuelli (Contact Author)

Washington University in St. Louis ( email )

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Saint Louis, MO MO 63130-4899
United States

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