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Corporate bonds

  • Tend to be illiquid
  • Risky debt has equity-like risk characteristics
  • Often bundled with warrants or have conversion features
  • These ``equity kickers'' keep yields reasonable

photo of Phil Dybvig
Phil Dybvig

Corporate bonds are illiquid and difficult to value between trades. Their illiquidity makes them most suitable for long-term investors who can plan to keep them in a portfolio for a long time.

Evaluation of credit risk is critical to pricing corporate bonds. The credit risk can be analyzed using a top-down approach which models default probabilities and credit rating directly, or using a bottom-up approach which models the cash flows of the issuing firm.


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Copyright © Philip H. Dybvig 1997, 2000