Scandinavian Working Papers in Business Administration
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2008/6: Level dependent annuities: Defaults of multiple degrees
Aksel Mjøs () and Svein-Arne Persson ()
Additional contact information
Aksel Mjøs: SNF - Institute for Research in Economics and Business Administration, Postal: SNF - Institute for Research in Economics and Business Administration, Breiviksveien 40, N-5045 Bergen, Norway
Svein-Arne Persson: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Abstract: Motivated by the risk of stopped debt coupon payments from a leveraged company in financial distress, we value a level dependent annuity contract where the annuity rate depends on the value of an underlying asset-process. The range of possible values of the asset is divided into a finite number of regions. The annuity rate is constant within each region, but may differ between the regions. We consider both in finite and finite annuities, with or without bankruptcy risk, i.e., bankruptcy occurs if the asset value process hits an absorbing boundary. Such annuities are common in models of debt with credit risk in financial economics. Suspension of debt service under the US Chapter 11 provisions is one well-known real-world example. We present closed-form formulas for the market value of such multi-level annuities contracts when the market value of the underlying asset is assumed to follow a geometric Brownian motion.
Keywords: Multi-level annuity; credit risk; financial distress
24 pages, March 12, 2008
Full text files
163926
- Norwegian School of Economics, Department of Business and Management Science
- Ordering Working Papers
- Home page for this series
Questions (including download problems) about the papers in this series should be directed to Stein Fossen ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:nhhfms:2008_006This page generated on 2024-11-12 04:36:01.