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A Model to Price Puttable Corporate Bonds with Default Risk

Author

Listed:
  • David Wang

    (Hsuan Chuang University)

Abstract

This paper presents a model for pricing puttable corporate bonds that are subject to default risk. The model incorporates three essential ingredients in the pricing of defaultable puttable bonds: stochastic interest rate, default risk, and put provision. The stochastic interest rate is modeled as a square-root diffusion process. The default risk is modeled as a constant spread, with the magnitude of this spread impacting the probability of a Poisson process governing the arrival of the default event. The put provision is modeled as a constraint on the value of the bond in the finite difference scheme. This paper can be used both as a benchmark for models for pricing puttable corporate bonds that are subject to default risk and as a direction for future research.

Suggested Citation

  • David Wang, 2005. "A Model to Price Puttable Corporate Bonds with Default Risk," Finance 0506014, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0506014
    Note: Type of Document - pdf; pages: 10
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0506/0506014.pdf
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    More about this item

    Keywords

    Default Risk; Puttable Bond;

    JEL classification:

    • G - Financial Economics

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    1. Puttable bond in Wikipedia English

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