A comprehensive model is suggested that values securities as options and consequently ordinary stock options as compound options. Extending the basic Black-Scholes model, it can incorporate common contractual features and stylized facts. More specifically, a closed form solution is derived for...

Assessments of the trade-off theory have typically compared the present value of tax benefits to the present value of bankruptcy costs. We verify that this comparison overwhelmingly favors tax benefits, suggesting that firms are under-leveraged. However, when we allow firms to experience even...

A difficulty that arises when implementing structural bond pricing models is the estimation of the value and risk of the firm's assets, neither of which is directly observable. We perform a simulation experiment to evaluate a maximum likelihood method applicable to this problem. Contrasting the...

We suggest a methodology for valuing corporate securities that allows the straightforward derivation of closed form solutions for complex scenarios. The tractability of the framework stems from its modularity-we provide a number of intuitive building blocks that are sufficient for valuation in...

Observable covariates are useful for predicting default, but several studies question their value for explaining credit spreads. We introduce a discrete-time no-arbitrage model with observable covariates, which allows for a closed-form solution for the value of credit default swaps (CDS). The...