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Learning Objectives
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This chapter explains how corporate bonds are valued. The value of a corporate bond depends on:
  • the level of interest rates
  • the term structure of interest rates
  • the risks associated with the bond
In this chapter, the differences between safe and risky debt are explained. The application of options theory to value risky debt and loan guarantees is explained. Bond ratings and default risk is explained in detail. Predicting the probability of default using credit rating models and the concept of value-at-risk are discussed.





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