On the Valuation and Analysis of Risky Debt: A Practical Approach Using Rating Migrations

32 Pages Posted: 30 Apr 2020

See all articles by Edwin O. Fischer

Edwin O. Fischer

University of Graz/Finance

Lisa-Maria Kampl

University of Graz

Ines Wöckl

University of Graz

Date Written: April 6, 2020

Abstract

This paper is concerned with the valuation and analysis of risky debt instruments with arbitrary interest and principal payments subject to default risk. For the valuation, we use a risk-neutral present value model with expected payments for risk-neutral investors and risk-free spot rates. The required risk-neutral default probabilities are derived from historically observable risk-averse migration matrices. Based on this debt valuation, we calculate various key figures for the analysis of risky debt from the point of view of risk-averse investors (e.g., promised and expected yields, yield spreads, Z-spreads, risk premia, risk-averse default probabilities, and risk-averse expected payments). Our approach is well-suited for practical applications, since the parameters required are easily available from observable data.

Keywords: risky debt, debt valuation, expected yield

JEL Classification: G21, G31, G32

Suggested Citation

Fischer, Edwin O. and Kampl, Lisa-Maria and Wöckl, Ines, On the Valuation and Analysis of Risky Debt: A Practical Approach Using Rating Migrations (April 6, 2020). Available at SSRN: https://ssrn.com/abstract=3569520 or http://dx.doi.org/10.2139/ssrn.3569520

Edwin O. Fischer

University of Graz/Finance ( email )

Universitätsstrasse
15/G2
Graz, 8010
Austria
+433163803510 (Phone)

Lisa-Maria Kampl (Contact Author)

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

Ines Wöckl

University of Graz ( email )

Universitätsstrasse 15 / G2
Graz, Styria 8010
Austria

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