http://hdl.handle.net/2451/25930 2026-04-11T15:12:26Z 2026-04-11T15:12:26Z Altman, Edward I. Cooke, Diane Kishore, Vellore http://hdl.handle.net/2451/26790 2008-05-29T06:09:51Z 1999-01-01T00:00:00Z

Title: Defaults & Returns on High Yield Bonds: Analysis Through 1998 and Default Outlook for 1999-2001 Authors: Altman, Edward I.; Cooke, Diane; Kishore, Vellore Abstract: Nineteen-ninety-eight was a mixed performance year for the high yield bond market in the United States , with much below average returns and spreads over default-risk-free Treasury Bonds but continued relatively low default rates and losses and another record year of new insurance. Returns and new insurance were excellent through the first seven months of the year but returns reversed and new issues dried up, temporarily, in the wake of August's Russians default and the emerging market turmoil, causing another short-term flight to quality. Returns in 1998 on high yield bonds in the U.S. were slightly above 4.0% for the entire year, about 8.5% lower than historical averages. Return spreads also were much below average (-8.7%). The default rate was again relatively low, 1.60%, and losses from default 1.1%. Despite 1998's low relative return, net returns (after deducting losses from defaults) over the last two decades continue to show a compound result over 12% per year and spreads over U.S. Treasuries of over 2.5% per year. New insurance of high yield debt in 1998 totaled a record $152 billion, with $120 billion of the total in the first seven and a half months. This report documents the high yield debt market's risk and return performance by presenting default and morality statistics and providing a matrix of average returns and other performance statistics over relevant periods of the market's evolution. Our analysis covers the period 1971-1998 for defaults and 1978-1998 for returns. In addition, we present our annual forecast of expected defaults for the next three years (1999-2001). Two other reports, published by the NYU Salomon Center, comprehensively document the performance of defaulted public bonds and bank loans and the default rate experience on syndicated bank loans.

1999-01-01T00:00:00Z Damodaran, Aswath http://hdl.handle.net/2451/26789 2008-05-29T06:06:07Z 1999-01-01T00:00:00Z

Title: Estimating Risk Parameters Authors: Damodaran, Aswath Abstract: Over the last three decades, the capital asset pricing model has occupied a central and often controversial place in most corporate finance analysts’ tool chests. The model requires three inputs to compute expected returns – a riskfree rate, a beta for an asset and an expected risk premium for the market portfolio (over and above the riskfree rate). Betas are estimated, by most practitioners, by regressing returns on an asset against a stock index, with the slope of the regression being the beta of the asset. In this paper, we attempt to show the flaws in regression betas, especially for companies in emerging markets. We argue for an alternate approach that allows us to estimate a beta that reflect the current business mix and financial leverage of a firm.

1999-01-01T00:00:00Z Elton, Edwin J. Gruber, Martin J. Agrawal, Deepak Mann, Christopher http://hdl.handle.net/2451/26788 2008-05-29T06:01:50Z 2000-10-26T00:00:00Z

Title: Factors Affecting the Valuation of Corporate Bonds Authors: Elton, Edwin J.; Gruber, Martin J.; Agrawal, Deepak; Mann, Christopher 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) The paper is divided into three sections. In the first section, we discuss various reduced form models that have been suggested in the literature. In the second section we examine how well standard classifications serve as a metric for forming homogeneous groups. In this section we show that using standard classifications results in errors being systematically related to specific bond characteristics. Finally, in the last section we take account of these specific bond characteristics in our estimation procedure for determining spot prices and show how this lead to improved estimates of corporate bond prices.

2000-10-26T00:00:00Z Acharya, Viral V. Carpenter, Jennifer N. http://hdl.handle.net/2451/26787 2008-05-29T06:04:31Z 2000-02-18T00:00:00Z

Title: Corporate Bonds: Valuation, Hedging, and Optimal call and Default Policies Authors: Acharya, Viral V.; Carpenter, Jennifer N. Abstract: This paper studies the valuation and risk management of callable, defaultable bonds when both interest rates and firm value are stochastic and when the issuer follows optimal call and default policies. Since interest rate sensitivity is low when call is imminent and firm value sensitivity is high when default is imminent, characterizing the issuer's call and default policies is essential to understanding corporate bond risk management. We develop analytical results on optimal call and default rules and use them to explain the dynamics of a hedging strategy for corporate bonds using Treasury bonds and issuer equity. To clarify the interaction between the issuer's embedded call and default options, we compare the callable defaultable bond to its pure callable and pure defaultable counterparts. Each bond's embedded option is a call on a riskless, noncallable host bond, distinguished only by its strike price. This generalized call option perspective generates intuition for a variety of results. For instance, spreads on all bonds, not just callables, narrow with interest rates; a decline in rates can trigger a default; a call provision can increase the duration of a risky bond; a call provision increases equity's sensitivity to firm value, mitigating the underinvestment problem identified by Myers (1977).

2000-02-18T00:00:00Z