Level Dependent Annuities: Defaults of Multiple Degrees

Posted: 5 Mar 2007 Last revised: 9 May 2012

See all articles by Aksel Mjøs

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance

Svein-Arne Persson

Norwegian School of Economics (NHH)

Date Written: March 3, 2008

Abstract

Motivated by the risk of stopped debt coupon payments from a leveraged company in ïB01nancial distress, we value a level dependent annuity contract where the annuity rate depends on the value of an underlying asset-process. The range of possible values of the asset is divided into a ïB01nite number of regions. The annuity rate is constant within each region. Such annuities are common in models of debt with credit risk in ïB01nancial economics.

Suspension of debt service under the US Chapter 11 provisions is one well-known real-world example. We present closed-form formulas for the market value of multi-level annuities contracts when the market value of the underlying asset is assumed to follow a geometric Brownian motion.

Keywords: multi-level annuity, credit risk, financial distress, barrier options

JEL Classification: G33, G13, G32

Suggested Citation

Mjøs, Aksel and Persson, Svein-Arne, Level Dependent Annuities: Defaults of Multiple Degrees (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=968130 or http://dx.doi.org/10.2139/ssrn.968130

Aksel Mjøs (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Svein-Arne Persson

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
47-55-95-90-00 (Phone)
47-55-95-96-47 (Fax)

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