Coupon Resets Versus Poison Puts
The Valuation of Event Risk Provisions in Corporate Debt
DOI:
https://doi.org/10.1016/1057-0810(94)90019-1Abstract
This paper examines the valuation of the two major types of event risk indenture provisions, poison puts and coupon resets, on the debt of industrial companies. In contrast with earlier work by Crabbe (1991), we find that protection provided by poison put type ofcovenants is not valued by investors. The inclusion of coupon reset provisions, however, lowers the yield spread of new issued industrial bonds by 32 basis points. The yields on bonds with low credit quality ratings are reduced by including coupon reset provisions in the bond indentures.
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