Pricing sub debt
Posted: February 9th, 2005, 8:42 pm
Hi,The market value of subordinated debt can be derived from the difference of two call options Black & Cox (1976). Suppose the market value of a firms assets is 100 with certain volatility. Also the market value of the firms senior debt is 100 (if that is possible?!). Now the firm issues zero coupon sub debt. The proceeds of this will be invested in assets with the same or some other volatility. Does this change the market value of the sub debt. Put it another way, is there a recursive relationship in hand? And is the market value of the senior debt influenced by this issue of sub debt?Any thoughts?