A framework for valuing corporate securities

Abstract

We suggest a methodology for valuing corporate securities that allows the straightforward derivation of closed form solutions for complex scenarios. The tractability of the framework stems from its modularity-we provide a number of intuitive building blocks that are sufficient for valuation in typical situations. A further advantage of our approach is that it makes economic interpretation far easier than what is typically possible with other approaches, such as solving systems of partial differential equations. As examples we consider a corporate coupon bond with discrete payments, and debt subject to strategic debt service.

Keywords:

• Option Pricing
• Barrier Options
• Corporate Debt
• Credit Risk