On the Pricing of Step-Up Bonds in the European Telecom Sector

David Lando, Allan Mortensen

Research output: Working paperResearch

Abstract

This paper investigates the pricing of step-up bonds, i.e. corporatebonds with provisions stating that the coupon payments increase as thecredit rating level of the issuer declines. To assess the risk-neutral ratingtransition probabilities necessary to price these bonds, we introduce a newcalibration method within the reduced-form rating-based model of Jarrow,Lando, and Turnbull (1997). We also treat split ratings and adjust forrating outlook. Step-up bonds have been issued in large amounts in theEuropean telecom sector, and we find that, through most of the sample,step-up bonds issued by the two largest issuers have traded at a discountrelative to comparable fixed-coupon bonds from the same issuers. Ourfindings cannot be attributed to traditional liquidity factors, and they suggestthat issuing step-up bonds increased the cost of capital for the issuers.Keywords: defaultable bonds, step-up coupons, rating-based modelsJEL classification: G12, G13
This paper investigates the pricing of step-up bonds, i.e. corporatebonds with provisions stating that the coupon payments increase as thecredit rating level of the issuer declines. To assess the risk-neutral ratingtransition probabilities necessary to price these bonds, we introduce a newcalibration method within the reduced-form rating-based model of Jarrow,Lando, and Turnbull (1997). We also treat split ratings and adjust forrating outlook. Step-up bonds have been issued in large amounts in theEuropean telecom sector, and we find that, through most of the sample,step-up bonds issued by the two largest issuers have traded at a discountrelative to comparable fixed-coupon bonds from the same issuers. Ourfindings cannot be attributed to traditional liquidity factors, and they suggestthat issuing step-up bonds increased the cost of capital for the issuers.Keywords: defaultable bonds, step-up coupons, rating-based modelsJEL classification: G12, G13
LanguageEnglish
Place of PublicationKøbenhavn
PublisherCopenhagen Business School [wp]
Number of pages47
ISBN (Print)8790705882
StatePublished - 2004

Keywords

    Cite this

    Lando, D., & Mortensen, A. (2004). On the Pricing of Step-Up Bonds in the European Telecom Sector. København: Copenhagen Business School [wp].
    Lando, David ; Mortensen, Allan. / On the Pricing of Step-Up Bonds in the European Telecom Sector. København : Copenhagen Business School [wp], 2004.
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    abstract = "This paper investigates the pricing of step-up bonds, i.e. corporatebonds with provisions stating that the coupon payments increase as thecredit rating level of the issuer declines. To assess the risk-neutral ratingtransition probabilities necessary to price these bonds, we introduce a newcalibration method within the reduced-form rating-based model of Jarrow,Lando, and Turnbull (1997). We also treat split ratings and adjust forrating outlook. Step-up bonds have been issued in large amounts in theEuropean telecom sector, and we find that, through most of the sample,step-up bonds issued by the two largest issuers have traded at a discountrelative to comparable fixed-coupon bonds from the same issuers. Ourfindings cannot be attributed to traditional liquidity factors, and they suggestthat issuing step-up bonds increased the cost of capital for the issuers.Keywords: defaultable bonds, step-up coupons, rating-based modelsJEL classification: G12, G13",
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    Lando, D & Mortensen, A 2004 'On the Pricing of Step-Up Bonds in the European Telecom Sector' Copenhagen Business School [wp], København.

    On the Pricing of Step-Up Bonds in the European Telecom Sector. / Lando, David; Mortensen, Allan.

    København : Copenhagen Business School [wp], 2004.

    Research output: Working paperResearch

    TY - UNPB

    T1 - On the Pricing of Step-Up Bonds in the European Telecom Sector

    AU - Lando,David

    AU - Mortensen,Allan

    PY - 2004

    Y1 - 2004

    N2 - This paper investigates the pricing of step-up bonds, i.e. corporatebonds with provisions stating that the coupon payments increase as thecredit rating level of the issuer declines. To assess the risk-neutral ratingtransition probabilities necessary to price these bonds, we introduce a newcalibration method within the reduced-form rating-based model of Jarrow,Lando, and Turnbull (1997). We also treat split ratings and adjust forrating outlook. Step-up bonds have been issued in large amounts in theEuropean telecom sector, and we find that, through most of the sample,step-up bonds issued by the two largest issuers have traded at a discountrelative to comparable fixed-coupon bonds from the same issuers. Ourfindings cannot be attributed to traditional liquidity factors, and they suggestthat issuing step-up bonds increased the cost of capital for the issuers.Keywords: defaultable bonds, step-up coupons, rating-based modelsJEL classification: G12, G13

    AB - This paper investigates the pricing of step-up bonds, i.e. corporatebonds with provisions stating that the coupon payments increase as thecredit rating level of the issuer declines. To assess the risk-neutral ratingtransition probabilities necessary to price these bonds, we introduce a newcalibration method within the reduced-form rating-based model of Jarrow,Lando, and Turnbull (1997). We also treat split ratings and adjust forrating outlook. Step-up bonds have been issued in large amounts in theEuropean telecom sector, and we find that, through most of the sample,step-up bonds issued by the two largest issuers have traded at a discountrelative to comparable fixed-coupon bonds from the same issuers. Ourfindings cannot be attributed to traditional liquidity factors, and they suggestthat issuing step-up bonds increased the cost of capital for the issuers.Keywords: defaultable bonds, step-up coupons, rating-based modelsJEL classification: G12, G13

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    KW - Finansiering

    KW - Telekommunikationsbranche

    KW - Erhvervsobligationer

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    SN - 8790705882

    BT - On the Pricing of Step-Up Bonds in the European Telecom Sector

    PB - Copenhagen Business School [wp]

    CY - København

    ER -

    Lando D, Mortensen A. On the Pricing of Step-Up Bonds in the European Telecom Sector. København: Copenhagen Business School [wp]. 2004.