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Risky debt, bad bank and government

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  • Murto, Risto
  • Eirola, Timo

Abstract

The purpose of this paper is to put forward a valuation framework for interest rate sensitive claims. We concentrate on secured loans. The value of the secured loan depends upon the coupon rate, the maturity, the term structure of interest rates and the value of the collateral as well as the probability of default. We follow Schwartz and Torous (1992) and assume that borrower's conditional probability of default is given by a hazards function. Furthermore, we value guarantees, junior secured debt and unemployment insurance.

Suggested Citation

  • Murto, Risto & Eirola, Timo, 1993. "Risky debt, bad bank and government," Bank of Finland Research Discussion Papers 16/1993, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1993_016
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    References listed on IDEAS

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    1. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    2. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 541-562.
    3. Jones, E. Philip & Mason, Scott P., 1980. "Valuation of loan guarantees," Journal of Banking & Finance, Elsevier, vol. 4(1), pages 89-107, March.
    4. Risto Murto, 1994. "Finnish banking crisis : can we blame bank management?," Finnish Economic Papers, Finnish Economic Association, vol. 7(1), pages 56-68, Spring.
    5. Schwartz, Eduardo S & Torous, Walter N, 1992. "Prepayment, Default, and the Valuation of Mortgage Pass-through Securities," The Journal of Business, University of Chicago Press, vol. 65(2), pages 221-239, April.
    6. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
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