NDLI: The Effect of Interest Rates on the Value of Corporate Assets and the Risk Premia of Corporate Debt

Content Provider	Springer Nature Link
Author	Lesseig, Vance Stock, Duane
Copyright Year	1998
Abstract	A growing number of papers have applied option pricing techniques to the valuation of risky debt. This paper deals directly with how a firm's relationship to interest rates affects its debt. A sequential binomial model is used to price the zero-coupon bonds of a firm whose value is related to interest rate changes.The results show that the strength of the relationship between firm value and interest rates (interest-rate risk) can have a significant impact on the value of a firm's debt. The model produces its most powerful results when the volatility of firm value is high and the term structure has a steep (negative or positive) slope; there is no impact when the term structure is flat. Our results indicate that empirical studies of yield spreads may have severe shortcomings if the relationship of firm value to interest rate changes is ignored.
Starting Page	5
Ending Page	22
Page Count	18
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	11
Issue Number	1
e-ISSN	15737179
Language	English
Publisher	Kluwer Academic Publishers
Publisher Date	1998-01-01
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Econometrics Accounting/Auditing Finance /Banking Operation Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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The Effect of Interest Rates on the Value of Corporate Assets and the Risk Premia of Corporate Debt