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Valuing Euro Rating-Triggered Step-Up Telecom Bonds

Author

Listed:
  • Patrick Houweling

    (Faculty of Economics, Erasmus University Rotterdam)

  • Albert Mentink

    (Erasmus University Rotterdam, and Aegon Asset Management)

  • Ton Vorst

    (VU University Amsterdam)

Abstract

We value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando andTurnbull (1997, JLT) framework, (ii) a similar framework using historical probabilities and(iii) as plain vanilla bonds. We find that the market seems to value single step-up bondsaccording to the JLT model, while it values multiple step-up bonds as plain vanilla bonds.Further, step-up feature market premiums are more volatile than JLT and historical premiums,and the JLT model approximates market premiums always better than the historical method.Finally, most step-up bonds offer a cushion against rating migrations via dampened pricemovements.

Suggested Citation

  • Patrick Houweling & Albert Mentink & Ton Vorst, 2003. "Valuing Euro Rating-Triggered Step-Up Telecom Bonds," Tinbergen Institute Discussion Papers 03-028/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030028
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    Cited by:

    1. Myklebust, Tor Åge, 2012. "Performance Sensitive Debt - Investment and Financing Incentives," Discussion Papers 2012/7, Norwegian School of Economics, Department of Business and Management Science.
    2. Koziol, Christian & Lawrenz, Jochen, 2010. "Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 182-204, April.
    3. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.

    More about this item

    Keywords

    step-up bonds; Jarrow-Lando-Turnbull model; rating-based reduced form model; transition probabilities.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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