Pricing the credit risk of secured debt and financial leasing


Realdon, Marco (2006) Pricing the credit risk of secured debt and financial leasing. Journal of Business Finance and Accounting, 33, (7-8), 1298-1320. (doi:10.1111/j.1468-5957.2006.00619.x).

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Description/Abstract

This paper presents closed form solutions to price secured bank loans and financial leases subject to default risk. Secured debt fair credit spreads always increase in the debtor's default probability, whereas financial leasing fair credit spreads may well decrease in the lessee's default probability and even be negative. The reason is that the lessor, unlike the secured lender, can gain from the lessee's default, especially when the leasing contract envisages initial prepayments or the lessee's terminal options to either purchase the leased asset or to extend the lease maturity. This result, which critically depends on contractual and bankruptcy code provisions, can explain some of the empirical evidence and the use of financial leases as an alternative to secured bank lending to finance small, risky and relatively opaque firms.

Item Type: Article
Additional Information:
ISSNs: 0306-686X (print)
Related URLs:
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 45628
Date Deposited: 18 Apr 2007
Last Modified: 27 Mar 2014 18:29
URI: http://eprints.soton.ac.uk/id/eprint/45628

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