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A sequential pricing framework for corporate securities: The case of rating-trigger step-up/-down bonds

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  • Bank, Matthias
  • Kupfer, Alexander

Abstract

We develop a sequential pricing framework in a continuous time cash flow model allowing for repeated valuation of different cash flow claims. One claim is valued until a prespecified boundary is hit, which is subsequently used as the new valuation starting point for the next claim. This highly flexible pricing framework is applied to the pricing of rating-trigger step-up/-down corporate bonds, the coupon payments of which depend on the issuing company’s credit rating. We present a simple closed-form pricing solution for this type of bonds including both a step-up and step-down threshold, as well as a lower default boundary.

Suggested Citation

  • Bank, Matthias & Kupfer, Alexander, 2014. "A sequential pricing framework for corporate securities: The case of rating-trigger step-up/-down bonds," Finance Research Letters, Elsevier, vol. 11(4), pages 437-445.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:4:p:437-445
    DOI: 10.1016/j.frl.2014.07.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Rating-trigger step-up/-down bonds; Performance-sensitive bonds; Performance-sensitive debt; Sequential pricing;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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