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Valuation of Defaultable Bonds and Debt Restructuring

AutorDumitrescu, Ariadna
Palabras claveDebt valuation
Defaultable bonds
Strategic contingent claim analysis
Modigliani-Miller theorem
Fecha de publicación8-oct-2003
SerieUFAE and IAE Working Papers
590.03
ResumenIn 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 the hierarchy of debt of a firm, 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 different 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.
URIhttp://hdl.handle.net/10261/1830
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