Pricing Corporate Securities as Contingent Claims
In 1973, Fischer Black, Myron Scholes, and Robert Merton pointed out that securities issued by a corporation can be priced as claims whose values are contingent on the value of the enterprise as a whole. The notion of treating corporate securities as contingent claims is intrinsically important, but it is also important because it integrates a variety of otherwise loosely related topics, including equity risk, credit risk, seniority and subordination, early redemption of callable debt, and conversion of convertible debt.
Bringing together developments from the past thirty years in contingent valuation, this book examines the relative value of securities in a corporation's capital structure, including debt of different priorities, convertible debt, common stock, and warrants. The book emphasizes the importance of accounting for the institutional characteristics of default, bankruptcy, and voluntary recapitalization of a financially distressed firm, as well as the exercise of managerial discretion in calling debt for early redemption, servicing debt, paying dividends to common shareholders, and undertaking strategic actions such as leveraged recapitalizations and spin-offs.
About the Author
Kenneth D. Garbade is Senior Vice President, Money and Payments Studies Function, Research and Statistics Group, at the Federal Reserve Bank of New York. He is the author of Fixed Income Analytics (1996), Pricing Corporate Securities as Contingent Claims (2001), both published by the MIT Press, and other books.
"I am impressed by Dr. Garbade's ability to explain complex concepts in a clear and concise manner. In particular, his reliance on the so-called 'binomial' model, in lieu of the usual analytical/stochastic calculus approach to explain various points in contingent claims analysis, is a breath of fresh air. The book should be accessible to a much wider audience as a result."--Arthur Warga, Dean and Judge James A. Elkins Chair of Banking and Finance, C.T. Bauer College of Business, University of Houston
"Kenneth Garbade is a pioneer in applying rigorous thinking and analysis to fixed income problems. He also has a deep knowledge of bond markets. This book is typical Garbade: He provides careful analysis of significant problems while taking into account the important characteristics of bonds and markets. A must read for anyone interested in bonds."--Edward J. Elton, Nomura Professor of Finance, Stern School of Business, New York University, and President, American Finance Association, 1999
"A great book. There is no other volume that I am aware of that brings together the combination of theoretical and empirical material or that focuses on corporate liabilities and covers them as completely."--Stephen Kealhofer, KMV Corporation