A simplified firm value-based risky discount bond pricing model

Alan T. Wang, Sheng Yung Yang

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


This paper proposes a simplified risky discount bond pricing model based on Longstaff and Schwartz (1995). The advantage of this model is that it yields a closed form solution for probability of default. Also, a practical feature with our model is that computing durations and other risk management tools become computationally less expensive, while the appealing properties in the LS model are preserved. The numerical comparisons show that the differences in credit spreads between this model and Longstaff and Schwartz are within a few basis points for fairly general parameter values. Moreover, the computational time is shown remarkably reduced by the simplified model. Sensitivity analysis of credit spread with respect to different parameter values is presented.

Original languageEnglish
Pages (from-to)445-468
Number of pages24
JournalReview of Pacific Basin Financial Markets and Policies
Issue number3
Publication statusPublished - 2007 Sept

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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