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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), pp. 1298-1320. (doi:10.1111/j.1468-5957.2006.00619.x).

Record type: Article

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.

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Published date: 2006

Identifiers

Local EPrints ID: 45628
URI: http://eprints.soton.ac.uk/id/eprint/45628
ISSN: 0306-686X
PURE UUID: 5a043899-ce1f-4c5b-b04e-132d1e43e0fa

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Date deposited: 18 Apr 2007
Last modified: 17 Jul 2017 15:11

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Author: Marco Realdon

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