Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86020
Authors: 
Houweling, Patrick
Mentink, Albert
Vorst, Ton
Year of Publication: 
2003
Series/Report no.: 
Tinbergen Institute Discussion Paper 03-028/2
Abstract: 
We value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando andTurnbull (1997, JLT) framework, (ii) a similar framework using historical probabilities and(iii) as plain vanilla bonds. We find that the market seems to value single step-up bondsaccording to the JLT model, while it values multiple step-up bonds as plain vanilla bonds.Further, step-up feature market premiums are more volatile than JLT and historical premiums,and the JLT model approximates market premiums always better than the historical method.Finally, most step-up bonds offer a cushion against rating migrations via dampened pricemovements.
Subjects: 
step-up bonds
Jarrow-Lando-Turnbull model
rating-based reduced form model
transition probabilities.
JEL: 
C13
G12
Document Type: 
Working Paper

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