Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors
September 1, 1990
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Summary
We develop a formula for the market value of debt when the borrower’s repayment capacity varies stochastically, and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of this curve are examined in response to changes in the underlying parameters. The calculations bring out some conflicts of interest among lenders of differing degrees of seniority. Most surprisingly, junior creditors gain when the loan is rescheduled on terms more favorable to the debtor.
Subject: Arrears, Debt service
Keywords: debtor country, market value, riskless rate, WP
Pages:
34
Volume:
1990
DOI:
Issue:
088
Series:
Working Paper No. 1990/088
Stock No:
WPIEA0881990
ISBN:
9781451952629
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 38, No. 4, December 1991.
