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Pricing the credit risk of secured debt and financial leasing

Realdon, M. (2006) Pricing the credit risk of secured debt and financial leasing. Journal of Business Finance and Accounting, 33 (7-8). pp. 1298-1320. ISSN 0306-686X

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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
Institution: The University of York
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: York RAE Import
Date Deposited: 04 Aug 2009 17:17
Last Modified: 04 Aug 2009 17:17
Published Version: http://dx.doi.org/10.1111/j.1468-5957.2006.00619.x
Status: Published
Publisher: Blackwell Publishing
Identification Number: 10.1111/j.1468-5957.2006.00619.x
URI: http://eprints.whiterose.ac.uk/id/eprint/6502

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