Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors

34 Pages Posted: 15 Feb 2006

See all articles by Leonardo Bartolini

Leonardo Bartolini

Deceased

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1990

Abstract

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

Bartolini (deceased), Leonardo and Dixit, Avinash K., Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors (September 1990). IMF Working Paper No. 90/88, Available at SSRN: https://ssrn.com/abstract=885039

Avinash K. Dixit

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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