Budhi Arta Surya
School Of Business And Management, Institut Teknologi Bandung, Indonesia

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Journal : The Asian Journal of Technology Management (AJTM)

Term Structure of Credit Spreads of A Firm When Its Underlying Assets are Discontinuous Surya, Budhi Arta
The Asian Journal of Technology Management (AJTM) Vol 3, No 2 (2010)
Publisher : School of Business and Management Institut Teknologi Bandung

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Abstract

We revisit the previous works of Leland [12], Leland and Toft [11] andHilberink and Rogers [7] on optimal capital structure and show that thecredit spreads of short-maturity corporate bonds can have nonzero valueswhen the underlying of the firm’s assets value has downward jumps. We givean analytical treatment of this fact under a general Levy process and discusssome numerical examples under pure jump processes.Keywords: Optimal capital structure, credit risk, term structure of creditspread