Document Type

Article

Publication Date

Spring 2015

Abstract

This study develops a semi-structural framework of bond pricing that incorporates default risk, taxes, and bond rating transition, whereas prior papers have primarily focused on the first (and more recently the second) factor. After capturing the three effects, the remaining spread between corporate bond rates and risk free rates can intuitively be attributed to liquidity. Models estimated without all three effects cannot intuitively dismiss the "unexplained" spread as a liquidity premium. This is confirmed by applying the framework to samples from two periods (1973-1993, and 2004-2010).

Publisher's Statement

© 2015 Financial Decisions Associates. Deposited here in compliance with publisher policies. Publisher's version of record: http://www.financialdecisionsonline.org/spring2015_index.htm

Journal homepage: www.financialdecisionsonline.org

Publication Title

Financial Decisions

Version

Publisher's PDF

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Business Commons

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