Valuing euro rating-triggered step-up telecom bonds

Valuing euro rating-triggered step-up telecom bonds

15-03-2004 | Research
We compare several pricing methods for rating-triggered step-up coupon bonds. We find that bonds from different issuers seem to be priced differently in the market.

Speed Read

  • We look how step-up bonds from six European telecom firms are priced
  • Bonds from different issuers seem to be priced differently
  • Most step-up bonds cushion against rating migrations via dampened price moves

The coupon for a rating-triggered step-up bond is increased if the bond rating falls below a trigger value. In some cases, subsequent increases can occur if the rating deteriorates further; the coupon may also be reduced if the bond rating recovers. The step-up feature partially protects the bondholder against credit risk and also provides an added incentive for the issuer to maintain its credit rating. Despite the greater complexity of the bond's payout, by March 2001, step-up bonds accounted for more than 40% of the euro-denominated telecom bond market.

In this paper,1 Houweling, Mentink, and Vorst construct a valuation framework based on the Jarrow-Lando-Turnbull model of ratings transitions. Then, using three variants on their model, they explore how step-up bonds issued by six European telecom companies are priced in the market. The “risk-neutral” version of the model uses information from market prices on plain vanilla bonds from the same issuers, to capture the market premium for credit risk.

The model then gives the marginal effect of the step-up provision. The authors find that bonds from different issuers seem to be priced differently in the market: some conform to the anticipated valuation, while others show no real difference in pricing between step-up and plain vanilla bonds.

1 Houweling, P., Mentink, A. and Vorst, T.C.F., 2004, ‘Valuing euro rating-triggered step-up telecom bonds, The Journal of Derivatives.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.


Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree