Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2003-04-02
Number: 03-028/2
Author-Name: Patrick Houweling
Author-Email: houweling@few.eur.nl
Author-Workplace-Name: Faculty of Economics, Erasmus University Rotterdam
Author-Name: Albert Mentink
Author-Email: amentink@aegon.nl
Author-Workplace-Name: Erasmus University Rotterdam, and Aegon Asset Management
Author-Name: Ton Vorst
Author-Email: avorst@feweb.vu.nl
Author-Workplace-Name: VU University Amsterdam
Title: Valuing Euro Rating-Triggered Step-Up Telecom Bonds
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.
Classification-JEL: C13; G12.
Keywords: step-up bonds; Jarrow-Lando-Turnbull model; rating-based reduced form model; transition probabilities.
File-Url: https://papers.tinbergen.nl/03028.pdf
File-Format: application/pdf
File-Size: 418016 bytes
Handle: RePEc:tin:wpaper:20030028