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A Theoretical Model for the Term Structure of Corporate Credit based on Competitive Advantage

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  • Bala Rajaratnam
  • Kanshukan Rajaratnam
  • Myuran Rajaratnam

Abstract

We derive the term structure of corporate credit based on the competitive advantage of a firm and the tax deductibility of its interest payments. We consider the competitive advantage enjoyed by the firm as the central tenet of our model and capture its eventual demise in a probabilistic manner. We compensate the bond holder for expected losses and then provide an additional spread based on the tax deductibility of interest payments. Our simple intuitive model appears to overcome some of the well†known shortcomings of structural credit risk models.

Suggested Citation

  • Bala Rajaratnam & Kanshukan Rajaratnam & Myuran Rajaratnam, 2017. "A Theoretical Model for the Term Structure of Corporate Credit based on Competitive Advantage," European Financial Management, European Financial Management Association, vol. 23(2), pages 183-210, March.
    • Handle: RePEc:bla:eufman:v:23:y:2017:i:2:p:183-210
    DOI: 10.1111/eufm.12095
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    References listed on IDEAS

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    Cited by:

    1. Pasquale De Luca, 2017. "The Company Fundamental Analysis and the Default Risk Ratio," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(10), pages 1-79, September.

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