Birchler, Urs W.; Hancock, Diana - Schweizerische Nationalbank (SNB) - 2004
We provide evidence that a bank's subordinated debt yield spread is not, by itself, a sufficient measure of default … risk. We use a model in which subordinated debt is held by investors with superior knowledge (informed investor). First, we … show that in theory the yield spread on subordinated debt must compensate investors for expected loss plus give them an …