FIN-01-051

Factors Affecting the Valuation of Corporate Bonds

October 2001

Edwin J. Elton, Martin J. Gruber, Deepak Agrawal and Christopher Mann

ABSTRACT

The valuation of corporate debt is an important issue in asset pricing. While there has been an enormous amount of theoretical modeling of corporate bond prices, there has been relatively little empirical testing of these models 1 . Recently there has been extensive development of rating based reduced form models. These models take as a premise that bonds when grouped by ratings are homogeneous with respect to risk. For each risk group the models require estimates of several characteristics such as the spot yield curve, the default probabilities and the recovery rate. These estimates are then used to compute the theoretical price for each bond in the group. The purpose of this article is to examine the pricing of corporate bonds when bonds are grouped by ratings, and to investigate the ability of characteristics, in addition to bond ratings, to improve the performance of rating based models. Most of our testing will be conducted in models which are in the spirit of the theory developed by Duffie and Singleton (1997) and Duffie (1999).


Edwin J. Elton
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0361
Fax: (212) 995-4233
Email: eelton@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~eelton

Martin J. Gruber
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0333
Fax: (212) 995-4233
Email: mgruber@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~mgruber

Deepak Agrawal
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0319
Email: dagrawal@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~dagrawal

Christopher Mann
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0718
Fax: (212) 995-4233
Email: cmann@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~cmann

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