Pricing the Strategic Value of Poison Put Bonds

50 Pages Posted: 1 May 1998

See all articles by Alexander David

Alexander David

University of Calgary - Haskayne School of Business

Abstract

In times of low liquidity for a firm, poison put bondholders can threaten to either force the company into a reorganization or to raise its borrowing costs. A multilateral bargaining solution for the strategic value is formulated at the time of exercise. Even infinitesimal bondholders, putting non-cooperatively, are able to extract more than the intrinsic value whenever the amount of putable debt exceeds the firm's effective liquidity. Prior to the crisis all financial assets are priced in a continuous-time framework when interest rates follow the Vasicek process and firm's debtholders are subject to a sharp price decline due to an LBO. The model is calibrated to one such recent crisis.

JEL Classification: G33, G12

Suggested Citation

David, Alexander, Pricing the Strategic Value of Poison Put Bonds. FEDS Paper Number 98-6. Available at SSRN: https://ssrn.com/abstract=81540 or http://dx.doi.org/10.2139/ssrn.81540

Alexander David (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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