Background Note | HBS Case Collection | January 2008

Valuing Risky Debt

by Joshua Coval and Erik Stafford

Abstract

This lesson develops the classical structural approach to pricing and hedging credit risk: Merton's (1974) contingent claims model of debt and equity claims. This model is used to make investment and risk management decisions in an over-the-counter (OTC) market for distressed bonds.

Keywords: Borrowing and Debt; Credit; Investment; Price; Risk Management; Mathematical Methods; Valuation;

Citation:

Coval, Joshua, and Erik Stafford. "Valuing Risky Debt." Harvard Business School Background Note 208-111, January 2008.