ValuingArttheEconomicsofMuseums.pptVIP

Emerging Market FinanceLecture 14: Valuation of Corporate Bonds Corporate Bond BT = X if VT X or = VT if VT Xwhere VT is the value of the firm at bond maturity T, and X the face value of a zero-coupon bond. Example Company ABC: Vt = $1 billion， ROA = 10%， Volatility(ROA) = 30%。 Consider a 5-yr zero-coupon bond with $500 million face value。 Then, the probability of bankruptcy in yr. 5 = 21.32%。 Relationship between Bond Maturity and Probability of Bankruptcy Standard Textbook Calculation According to standard textbook,Bt = {500*p + E(VT) * (1-p) }/(1+r)^(T-t)where p = prob of No bankruptcy in yr 5 and E(VT) = the expected value of the firm if bankruptcy occurs If r=2%，then Bt = $450.6 million and 5-yr corporate bond yield =3.53% If no recovery of value at bankruptcy, then the picture differs Bt = 500*p /(1+r)^(T-t) Bt = $407.6 million No recovery vs. full recovery Spread between Corporate and Government Bond Yields * Yale School of Management * Yale School of Management Years to Maturity And the 5-yr bond yield = 7.05%。 Based on Textbook Actual corp. bond yields in China (2002) No recovery assumed Bond Yi e l d Years to Maturity Actual Spread (2002) No recovery assumed Yield Spread Years to Maturity