switzerlanden
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
Subscribe
Disclaimer

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.

Logo

Disclaimer Robeco Switzerland Ltd.

The information contained on these pages is for marketing purposes and solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients. 

The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Affolternstrasse 56, 8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website www.robeco.ch. Some funds about which information is shown on these pages may fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA). 

Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the RobecoSwitzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile. 

Neither information nor any opinion expressed on this 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 Switzerland Ltd. product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports. 

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

I Disagree