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16

 

Princeton University Press (Visit publisher website)

2004

English

 

 

 

Advanced

 

 

Credit risk, , credit risk pricing models, default probability estimation, endogenous default boundaries, optimal capital structure, bankruptcy costs, tax advantages of issuing debt, Leland`s model, difference between Leland`s model and option-based models, maturity structure, EBIT-based models, model with strategic debt service

 

From the author - It is easy to build models which capture the trade-off between bankruptcy and tax shield advantages qualitatively. In this section we focus on a class of models which allows us to make more clear-cut quantitative predictions on the chosen levelof leverage and on the effects on credit spread for corporate bonds. The framework provides insights not only into the static choice of capital structure, but also gives us tools to analyze dynamic capital-structure choice, including important features such as maturity choice, callable debt, and strategic models of renegotiation.

 

3.1 Leland’s Model
3.2 A Model with a Maturity Structure
3.3 EBIT-Based Models
3.4 A Model with Strategic Debt Service
3.5 Bibliographical Notes

 

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*** From the publisher ***

Credit risk is today one of the most intensely studied topics in quantitative finance. This book provides an introduction and overview for readers who seek an up-to-date reference to the central problems of the field and to the tools currently used to analyze them. The book is aimed at researchers and students in finance, at quantitative analysts in banks and other financial institutions, and at regulators interested in the modeling aspects of credit risk.

David Lando considers the two broad approaches to credit risk analysis: that based on classical option pricing models on the one hand, and on a direct modeling of the default probability of issuers on the other. He offers insights that can be drawn from each approach and demonstrates that the distinction between the two approaches is not at all clear-cut. The book strikes a fruitful balance between quickly presenting the basic ideas of the models and offering enough detail so readers can derive and implement the models themselves. The discussion of the models and their limitations and five technical appendixes help readers expand and generalize the models themselves or to understand existing generalizations. The book emphasizes models for pricing as well as statistical techniques for estimating their parameters. Applications include rating-based modeling, modeling of dependent defaults, swap- and corporate-yield curve dynamics, credit default swaps, and collateralized debt obligations.