The pricing of risky corporate debt to be issued at par value

Abstract

This paper extends the pricing of risky corporate debt in order to determine the promised payment and the promised yield to maturity that would permit the firm to issue a risky discount bond at par. We use iteration. The sequence of successive approximations for the quasi debt-to-asset value is convergent, and the resulting sequence of approximations for the market value of a risky discount bond approaches par value. The rate of return required to issue the risky discount bond at par is calculated. The results are consistent with Merton (1974) and differ only in the method of successive approximations to determine the promised payment on a risky discount bond to be issued at par. © 1995.