Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors

September 1, 1990

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Leonardo Bartolini, and Avinash K Dixit. Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors, (USA: International Monetary Fund, 1990) accessed October 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We develop a formula for the market value of debt when the borrower’s repayment capacity varies stochastically, and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of this curve are examined in response to changes in the underlying parameters. The calculations bring out some conflicts of interest among lenders of differing degrees of seniority. Most surprisingly, junior creditors gain when the loan is rescheduled on terms more favorable to the debtor.

Subject: Arrears, Debt service

Keywords: Debtor country, Market value, Riskless rate, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1990/088
Stock No:

WPIEA0881990
ISBN:

9781451952629
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 38, No. 4, December 1991.

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