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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Pricing the Strategic Value of Poison Put Bonds
Alexander David

Abstract: In times of low liquidity for a firm, poison put bondholders can threaten to either force the company into a reorganization or to raise its borrowing costs. A multilateral bargaining solution for the strategic value is formulated at the time of exercise. Even infinitesimal bondholders, putting non-cooperatively, are able to extract more than the intrinsic value whenever the amount of putable debt exceeds the firm's effective liquidity. Prior to the crisis all financial assets are priced in a continous-time framework when interest rates follow the Vasicek process and firm's debtholders are subject to a sharp price decline due to an LBO. The model is calibrated to one such recent crisis --- that of Kmart Corp.

Keywords: Covenants, effective liquidity, multilateral-bargaining, rating boundaries

Full paper (619 KB PDF) | Full paper (993 KB Postscript)

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Last update: March 3, 1998