Factors affecting the valuation of corporate bonds

Abstract

journal of banking & finance 28 (2004) 2747–2767 www.elsevier.com/locate/econbase factors affecting the valuation of corporate bonds edwin j. elton a,*, martin j. gruber a, deepak agrawal b, christopher mann c a stern school of business, 44 west 4th street, new york, ny 10012, usa b km moody’s, 1620 montgomery street, san francisco, ca 94111, usa c moody’s, 99 church street, new york, ny 10007, usa available online 14 august 2004 abstract an important body of literature in financial economics accepts bond ratings as a sufficient metric for determining homogeneous groups of bonds for estimating either risk-neutral probabilities or spot rate curves for valuing corporate bonds. in this paper we examine moody(cid:1)s and standard & poors ratings of corporate bonds and show they are not sufficient metrics for determining spot rate curves and pricing relationships. we investigate several bond characteristics that have been hypothesized as affecting bond prices and show that from among this set of measures default risk, liquidity, tax liability, recovery rate and bond age leads to better estimates of spot curves and for pricing bonds. this has implications for what factors affect corporate bond prices as well as valuing individual bonds. (cid:1) 2004 elsevier b.v. all rights reserved. jel classification: e43; g12 keywords: bonds; valuation; ratings; risk * corresponding author. address: management education center, stern school of business, 44 west 4th street, new york, ny 10012, usa. …

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