TY - JOUR T1 - Pricing Corporate Bonds with Rating-Based Covenants JF - The Journal of Fixed Income SP - 57 LP - 64 DO - 10.3905/jfi.2003.319339 VL - 12 IS - 4 AU - Karan Bhanot Y1 - 2003/03/31 UR - https://pm-research.com/content/12/4/57.abstract N2 - A corporate bond indenture often includes covenants that allow bondholders to take specific actions (e.g., force prepayment or reorganization) if certain specific conditions are violated. A typical covenant is triggered by a downgrade in credit rating. This article provides a simple framework for the valuation of a corporate bond with a rating-based covenant. Basic assumptions that are consistent with empirical evidence are that a downgrade in credit rating is accompanied by more volatility in assets, and that corporate reorganization after a rating change results in a change in payments to equityholders and other securityholders. The model may be used to compare risky bonds with covenants and bonds without convenants. ER -