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Pricing the strategic value of poison put bonds

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  • Alexander David

Abstract

In times of low liquidity for a firm, poison put bondholders can threaten to either force the company into a reorganization or to raise its borrowing costs. A multilateral bargaining solution for the strategic value is formulated at the time of exercise. Even infinitesimal bondholders, putting non-cooperatively, are able to extract more than the intrinsic value whenever the amount of putable debt exceeds the firm's effective liquidity. Prior to the crisis all financial assets are priced in a continuous-time framework when interest rates follow the Vasicek process and firm's debtholders are subject to a sharp price decline due to an LBO. The model is calibrated to one such recent crisis --- that of Kmart Corp.

Suggested Citation

  • Alexander David, 1998. "Pricing the strategic value of poison put bonds," Finance and Economics Discussion Series 1998-06, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-06
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    References listed on IDEAS

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