Date of Original Version

12-16-2004

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

I extract credit pricing information from the prices of callable corporate debt, by disentangling the components of callable corporate bond prices associated with discounting at market interest rates, discounting for default risk, and optionality. The results include the first empirical analysis, in the setting of standard arbitrage-free term-structure models, of the time-series behavior of callable corporate bond yield spreads, explicitly incorporating the valuation of the American call options. As an application, I consider medium-quality callable issues of Occidental Petroleum Corporation, using a three-factor model for the term structures of benchmark (LIBOR-dollar) swap rates and for Occidental yield spreads.

Share

COinS