Risky Debt, Jump Processes and Safety Covenants (Classic Reprint)

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Excerpt from Risky Debt, Jump Processes and Safety CovenantsBlack and Cox [2] analyze the effects of certain bond indenture provi sions on the valuation of corporate securities. One specific problem addressed in their paper is the valuation of a risky discount bond in the presence of a safety covenant. A safety covenant is a provision of a bond indenture stipulating that if the value of the firm falls to or below a specified level then the bondholders are entitled to some immediate settle ment of their claim on the firm.The analysis of Black and Cox [2] assumes that the dynamics for the value of the firm can be described by a diffusion process. They suggest that the value of the debt may be altered if the value of the firm follows a jump process since it would then be possible for the value of the firm to reach points below the barrier specified by the safety covenant without first passing through it.About the PublisherForgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.comThis book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully, any imperfections that remain are intentionally left to preserve the state of such historical works.