Evaluating Corporate Debts with Complex Liability Structures and Debt Covenants under the Jump-Di usion Process

[[abstract]]A default-free bond can be evaluated independently from other outstanding bonds of the same issuer as their value has no e ects on it. However, a risky bond issued by a defaultable issuer is di erent as the existence of other outstanding bonds of the same issuer will impact its value. Furthermore, the complex liability structures and bond covenants signi cantly in uence the prices of risky bonds. This increases the complexity of pricing and in turn makes analytical formulas intractable. The popular structural model is a credit model that models the evolution of the asset value and speci es the conditions leading to default. This paper prices risky bonds by incorporating the complex liability structure and bond covenants into the structural model. An e cient tree model is then provided to price risky bonds. Because of its accuracy, this numerical model is of great help to exploring how credit spreads are in uenced by the debt covenants and the change of the liability structure due to bond repayments or bond issuances. The jump-di usion process is known to t the empirical data better for its ability to generate large credit spreads for short-term corporate bonds and rich dynamics of the term structure of credit spreads. It can also be incorporated into our tree model