In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issue...

This paper highlights the role of the domestic tax system in determining the economic consequences of an external debt overhang. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of the debt Laf...

We examine whether the presence of alternative debt covenant designs (threshold tightness, covenants frequency and covenant interdependence) reduces the adverse effect of poor accounting quality on debt cost in the private lending market. Our results indicate that when lenders face borrowing firms characterized by low accounting quality (hereafter, low quality borrowers), the lender tends to in...

An assumption in prior research is that debt is homogeneous and provides inappropriate governance for R&D investments. We argue that debt is heterogeneous: although transactional debt does indeed impose strict contractual constraints that provide inappropriate governance for R&D investments, relational debt has very different characteristics that provide more appropriate governance. Using a sam...

We propose a restructuring of U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal. The debt should be composed of the following: 1) Fixedvalue, floating-rate, electronically transferable debt. Such debt looks like a money-market fund, or reserves at the Fed, to an investor. 2) Nominal perpetuities. This debt pays a coupon of $1 per bond, forever. 3) Indexe...

The aim of this paper is to use copulas functions to capture the different structures of dependency when we deal with portfolios of dependent credit risks and a basket of credit derivatives. We first present the wellknown result for the pricing of default risk, when there is only one defaultable firm. After that, we expose the structure of dependency with copulas in pricing dependent credit der...

We postulate a new method of measuring debt which we call the debt burden (DB). We claim that DB reveals the true debt obligations of the fiscal authority by taking the intertemporal debt obligations of the government into account. It is more accurate and more transparent than the currently used methods of assessing debt. DB is calculated on a daily basis and it clearly identifies debt risks. I...

Modelling the dynamics of credit derivatives is a challenging task in finance and economics. The recent crisis has shown that the standard market models fail to measure and forecast financial risks and their characteristics. This work studies risk of collateralized debt obligations (CDOs) by investigating the evolution of tranche spread surfaces and base correlation surfaces using a dynamic sem...

We develop a political-economic model of sovereign debt that shows that income inequality leads to popular pressures on the government to use foreign debt to Þnance a redistribution of income at the expense of productive public investment. Recognizing this fact international lenders impose credit ceilings with the consequence that developing country borrowers invest less and grow slower. ∗We ar...