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“Factors affecting the valuation of corporate bonds”

In: Investments And Portfolio Performance

Author

Listed:
  • Edwin J. Elton

    (Stern School of Business, 44 West 4th Street, New York, NY 10012, USA)

  • Martin J. Gruber

    (Stern School of Business, 44 West 4th Street, New York, NY 10012, USA)

  • Deepak Agrawal

    (KM Moody's, 1620 Montgomery Street, San Francisco, CA 94111, USA)

  • Christopher Mann

    (Moody's, 99 Church Street, New York, NY 10007, USA)

Abstract

An important body of literature in Financial Economics accepts bond ratings as a sufficient metric for determining homogeneous groups of bonds for estimating either risk-neutral probabilities or spot rate curves for valuing corporate bonds. In this paper we examine Moody's and Standard & Poors ratings of corporate bonds and show they are not sufficient metrics for determining spot rate curves and pricing relationships. We investigate several bond characteristics that have been hypothesized as affecting bond prices and show that from among this set of measures default risk, liquidity, tax liability, recovery rate and bond age leads to better estimates of spot curves and for pricing bonds. This has implications for what factors affect corporate bond prices as well as valuing individual bonds.

Suggested Citation

  • Edwin J. Elton & Martin J. Gruber & Deepak Agrawal & Christopher Mann, 2010. "“Factors affecting the valuation of corporate bonds”," World Scientific Book Chapters, in: Edwin J Elton & Martin J Gruber (ed.), Investments And Portfolio Performance, chapter 4, pages 53-73, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814335409_0004
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