Abstract
We revisit the previous works of Leland [12], Leland and Toft [11] and Hilberink and Rogers [7] on optimal capital structure and show that the credit spreads of short-maturity corporate bonds can have nonzero values when the underlying of the firm’s assets value has downward jumps. We give an analytical treatment of this fact under a general Levy process and discuss some numerical examples under pure jump processes.
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