Hello, Login
X

Forgot Password?

Join Us

to start. Not a member? Join Today!
LinkedIn Join us on
Investment Management Information
“Bridging the theory & practice of investment management”
Email
Advanced Search →
  • Home
  • Journal
    • About
    • Subscribe to the Journal
      • Subscriptions
      • Library Subscriptions
    • Harry M. Markowitz Award
    • Submit a Paper
      • Article Guidelines
      • Practitioner’s Guidelines
    • Reprints & Permissions
  • Conferences
    • JOIM Conference Events
    • About
    • Membership
    • Board Members
  • Library Access
  • Contact
  • Help

0 comments / 2015-02-18 /

VALUING HIGH YIELD BONDS: A BUSINESS MODELING APPROACH

Thomas S. Y. Ho and Sang Bin Lee

This paper proposes a valuation model of a bond with default risk. Extending from the Brennan and Schwartz real option model of a firm, the paper treats the firm as a contingent claim on the business risk. This paper introduces the “primitive firm,” which enables us to value firms with operating leverage relative to a firm without operating leverage. This paper emphasizes the business model of the firm, relating the business risk to the firm’s uncertain cash flow and its assets and liabilities. In so doing, the model can relate the financial statements to the risk and the value of the firm. The paper then uses Merton’s structural model approach to determine the bond value. This model considers the fixed operating costs as payments of a “perpetual debt,” and the financial debt obligations are junior to the operating costs. Using the structural model framework, we relative value the bond to the observed firm’s market capitalization, and provide a model that is empirically testable. We also show that this approach can better explain some of the high yield bond behavior. In sum, this model extends the valuation of high yield bonds to incorporate the business models of the firms and endogenizes the firm value stochastic process, which is a key element in high yield valuation, in practice. We have shown that in relating the firm’s business model to the firm value, the resulting firm value stochastic process affects the bond value significantly.

Checkout Added to cart

Next Article: CORRELATED DEFAULT PROCESSES: A CRITERION-BASED COPULA APPROACH

Previous Article: STRUCTURAL VERSUS REDUCED FORM MODELS: A NEW INFORMATION BASED PERSPECTIVE

JOIM

    Library Access

    Subscribe to the Journal
    Submit a Paper
    Harry M. Markowitz Award
    Editorial Board
    Upcoming Conferences

    Edit Profile

Recent Comments

    JOIM

      About the JOIM
    • Library Access
    • Subscribe to the Journal
    • Submit a Paper
    • Editorial Board
    • Harry M. Markowitz Award
    • Licensing Rights and Advertising
    • Terms and Conditions

    JOIM Conference Series

    • About
    • Upcoming Conferences
    • Membership
    • Board Members
    • Terms & Conditions
    Speaker Reimbursement Policy

    Contact

    Journal Of Investment Management (JOIM)
    3658 Mt. Diablo Blvd., Suite 200
    Lafayette, CA 94549
    www.joim.com

    customerservice @ joim.com
    (925) 299-7800

    Copyright 2019 — Journal Of Investment Management design by SEO Web Designers