TY - JOUR
T1 - Valuation of defaultable bonds and debt restructuring
AU - Dumitrescu, A.
PY - 2007/3
Y1 - 2007/3
N2 - In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.
AB - In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.
KW - Debt valuation
KW - Defaultable bonds
KW - Modigliani-Miller theorem
KW - Strategic contingent claim analysis
UR - http://www.scopus.com/inward/record.url?scp=33847081149&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2006.07.001
DO - 10.1016/j.jcorpfin.2006.07.001
M3 - Article
AN - SCOPUS:33847081149
SN - 0749-5978
VL - 102
SP - 94
EP - 111
JO - Organizational Behavior and Human Decision Processes
JF - Organizational Behavior and Human Decision Processes
IS - 2
ER -