A Framework for Valuing Corporate Securities

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A Framework for Valuing Corporate Securities

by Jan Ericsson of the Catholic University of Louvain, and
Joel Reneby of the Stockholm School of Economics

October 1998

Abstract: We suggest a methodology for valuing corporate securities that allows the straightforward derivation of closed form solutions for complex capital structure scenarios. The tractability of the approach stems from its modularity - we provide a number of intuitive building blocks that are sufficient for valuation in most typical situations. A further advantage of our approach is that it makes economic interpretation far easier than what is typically possible with other approaches such as solving partial differential equations. As examples we consider a corporate coupon bond with discrete payments and debt subject to strategic debt service.

Keywords: Option Pricing, Barrier Options, Corporate Debt, Credit Risk.

Published in: Applied Mathematical Finance, Vol. 5, No. 3-4, (September 1998), pp. 143-163.

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