Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors

Author/Editor:

Leonardo Bartolini ; Avinash K Dixit

Publication Date:

September 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1990/088

Subject:

Notes:

Also published in Staff Papers, Vol. 38, No. 4, December 1991.

English

Publication Date:

September 1, 1990

ISBN/ISSN:

9781451952629/1018-5941

Stock No:

WPIEA0881990

Pages:

34

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