Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors
34 Pages Posted: 15 Feb 2006
Date Written: September 1990
We develop a formula for the market value of debt when the borrower`s repayment capacity varies stochastically, and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of this curve are examined in response to changes in the underlying parameters. The calculations bring out some conflicts of interest among lenders of differing degrees of seniority. Most surprisingly, junior creditors gain when the loan is rescheduled on terms more favorable to the debtor.
JEL Classification: 433, 443, 521
Suggested Citation: Suggested Citation