Valuing Interest Payment Guarantees on Developing Country Debt

26 Pages Posted: 15 Feb 2006

See all articles by Eduardo Borensztein

Eduardo Borensztein

Inter-American Development Bank (IADB)

George Pennacchi

University of Illinois

Date Written: March 1990

Abstract

This paper develops a technique to value guarantees on interest payments on developing-country debt, and provides some preliminary estimates of the cost of such guarantees. The cost of interest payment guarantees is not directly observable because a guarantee is a contingent obligation that becomes effective only if the debtor fails to make a certain payment. The strategy adopted in this paper is to estimate the market price that an interest payment guarantee would have if such a contract existed and were traded in financial markets. Using results from option pricing theory it is possible to calculate the price that an "interest guarantee contract" would carry in financial markets on the basis of the price of developing-country debt in secondary markets.

JEL Classification: 433, 521

Suggested Citation

Borensztein, Eduardo and Pennacchi, George G., Valuing Interest Payment Guarantees on Developing Country Debt (March 1990). IMF Working Paper No. 90/18, Available at SSRN: https://ssrn.com/abstract=884627

Eduardo Borensztein (Contact Author)

Inter-American Development Bank (IADB) ( email )

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Washington, DC 20577
United States

George G. Pennacchi

University of Illinois ( email )

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515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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