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Bond Finance and the Leverage Ratio

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Abstract

A binding pledgeable income constraint limits movements in the leverage ratio but permits some flexibility in the choice of bond versus loan finance in response to changes in key parameters. Due to the existence of distress costs of bond finance in the low payoff state, the share of bond finance remains low compared to more expensive loan finance under both constrained and unconstrained profit maximization.

Suggested Citation

  • Alfred V. Guender, 2022. "Bond Finance and the Leverage Ratio," Working Papers in Economics 22/11, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:22/11
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/2211.pdf
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    References listed on IDEAS

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    5. Michael Schwert, 2020. "Does Borrowing from Banks Cost More than Borrowing from the Market?," Journal of Finance, American Finance Association, vol. 75(2), pages 905-947, April.
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    More about this item

    Keywords

    Bonds; Loans; Leverage ratio; Distress cost; Pledgeable income constraint;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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