On the Valuation and Analysis of Risky Debt: A Theoretical Approach Using a Multivariate Extension of the Merton Model

Abstract

We contribute to the literature on the valuation of risky debt by providing three nested multivariate extensions of the standard Merton model. First, we lay forth an approach to pricing risky debt irrespective of its interest payment structure and the specified redemption agreement. Second, we propose a technique for valuing multiple debt instruments within the same firm. Third, we provide an approach for pricing one or more debt instruments with continuous dividend payments.