Fixed rate and floating rate debt models with default risk

1999 ◽  
Author(s):  
Ge Sun
Keyword(s):  
Default Risk ◽  
Fixed Rate ◽  
Floating Rate

Option Theory and Floating-Rate Securities with a Comparison of Adjustable- and Fixed-Rate Mortgages

1993 ◽  
Vol 66 (4) ◽  
pp. 595 ◽  
Author(s):  
James B. Kau ◽  
Donald C. Keenan ◽  
Walter J. Muller III ◽  
James F. Epperson
Keyword(s):  
Fixed Rate ◽  
Floating Rate ◽  
Option Theory

scholarly journals Jump Diffusion Models for Risky Debts: Quality Spread Differentials

2003 ◽  
Vol 06 (06) ◽  
pp. 655-662 ◽  
Author(s):  
Hoi Ying Wong ◽  
Yue Kuen Kwok
Keyword(s):  
Diffusion Process ◽  
Closed Form ◽  
Firm Value ◽  
Jump Diffusion ◽  
Brownian Diffusion ◽  
Fixed Rate ◽  
Floating Rate ◽  
The Difference ◽  
The Impact ◽  
Risky Debt

The quality spread differential is defined to be the difference between the default premiums demanded for fixed rate and floating rate risky debts. The risky debt model based on Merton's firm value approach is used to examine the behaviors of the quality spread differential of fixed rate and floating rate debts. We extend earlier result by adopting Geometric Brownian diffusion process with jumps for the underlying firm value process of the debt issuer. Closed form formulas are obtained for the default premiums for risky debts. The impact of the jumps on the fixed-floating spread differential is examined.

Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk

2001 ◽  
Vol 49 (1) ◽  
pp. 54-79 ◽  
Author(s):  
Lisa L. Posey ◽  
Abdullah Yavas
Keyword(s):  
Default Risk ◽  
Fixed Rate

scholarly journals Credit Risk and Prepayment Option

1992 ◽  
Vol 22 (1) ◽  
pp. 81-96 ◽  
Author(s):  
Philippe Artzner ◽  
Freddy Delbaen
Keyword(s):  
Credit Risk ◽  
Default Risk ◽  
Corporate Bonds ◽  
Insurance Contract ◽  
Martingale Measure ◽  
Fixed Rate ◽  
Secondary Markets ◽  
Risk Neutral ◽  
Prepayment Option ◽  
Risk Insurance

AbstractThe paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox” example is presented with a spreadsheet treatment.

scholarly journals The Use of Fixed-rate and Floating-rate Debt for Hotels

2005 ◽  
Vol 46 (4) ◽  
pp. 413-430 ◽  
Author(s):  
John B. (Jack) Corgel ◽  
Scott Gibson
Keyword(s):  
Fixed Rate ◽  
Floating Rate

scholarly journals Option-based valuation of mortgage-backed securities

2010 ◽  
Vol 55 (186) ◽  
pp. 42-66 ◽  
Author(s):  
Ana Manola ◽  
Branko Urosevic
Keyword(s):  
Default Risk ◽  
Global Financial Crisis ◽  
Fixed Rate ◽  
Binomial Tree ◽  
Default Rates ◽  
Proposed Model ◽  
Mortgage Backed Securities ◽  
Prepayment And Default ◽  
Pass Through ◽  
The Global Financial Crisis

Pure econometric approaches to pricing mortgage-backed securities (MBSs) - principal pricing vehicles used by financial practitioners - fail to capture their true risks. This point was powerfully driven home by the global financial crisis. Since prior to the crisis default rates of MBSs were quite modest, econometric pricing models systematically underestimated the possibility of default. As a result, MBSs were severely overvalued. It is widely believed that the global crisis was largely triggered by incorrect valuation of mortgage-backed securities. In the aftermath, it is important to revisit the foundations for pricing MBSs and to pay much closer attention to default risk. This paper introduces a comprehensive model for valuation of fixed-rate pass-through mortgagebacked securities in a simple option-based framework. In the model, we use bivariate binomial tree approach to simultaneously model prepayment and default options. Our simulation results demonstrate that the proposed model has sufficient flexibility to capture the two principal risks.

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