PPT Slide

Longstaff- Schwartz model (1995)

Interest rate uncertainty

Vasicek interest rate process: dr = a(c - r)dt + srdZr

Bankruptcy-triggering mechanism

Threshold value ?(t) for the firm value at which financial distress

occurs: take ?(t) = K = constant.

* If a reorganization occurs during the life of the bond, the

bondholder receives (1- ?) times the par value at maturity.

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