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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

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How to Cite
Surya, B. A. (2010). Term Structure of Credit Spreads of A Firm When Its Underlying Assets are Discontinuous. The Asian Journal of Technology Management (AJTM), 3(2). Retrieved from https://journal.sbm.itb.ac.id/index.php/ajtm/article/view/169