Default-Triggered Acquisition (I): Pricing Risky Bond with Potential Buyers of the Distressed Firm

TY - UNPB

T1 - Default-Triggered Acquisition (I): Pricing Risky Bond with Potential Buyers of the Distressed Firm

AU - Cheung, Wing

AU - Satchell, Stephen

PY - 2008

Y1 - 2008

N2 - This paper develops a structural model of the defaultable bond, in which default-triggered acquisition opportunities are taken into account. In this model, post-default acquisition is treated as an event that is triggered when the alternative valuation of the firm's assets exceeds the failing firm's value, and covers the acquisition costs, which are essentially the conceded debt liability. Analytical results are derived for the cases where default time is assumed either to be fixed (as in Merton (1974)), or random (as in Black and Cox (1976)), and where there areone or more alternative valuations. This paper contributes to the literature on debt recovery by suggesting an analytical structure on the recovery rate.

AB - This paper develops a structural model of the defaultable bond, in which default-triggered acquisition opportunities are taken into account. In this model, post-default acquisition is treated as an event that is triggered when the alternative valuation of the firm's assets exceeds the failing firm's value, and covers the acquisition costs, which are essentially the conceded debt liability. Analytical results are derived for the cases where default time is assumed either to be fixed (as in Merton (1974)), or random (as in Black and Cox (1976)), and where there areone or more alternative valuations. This paper contributes to the literature on debt recovery by suggesting an analytical structure on the recovery rate.

M3 - Working paper

BT - Default-Triggered Acquisition (I): Pricing Risky Bond with Potential Buyers of the Distressed Firm

ER -