Sovereign Debt Maturity Structure and Dilution
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The maturity structure of debt plays an important role in default probability and the resulting pricing of sovereign bonds. Using a calibrated model this paper shows that both the default probabilities and the prices get improved when the sovereign issues long-term bonds or both short- and long-term bonds instead of issuing only short-term bonds. This paper also shows that the inclusion of the compensation covenant mitigates the dilution problem of sovereign debt on a larger scale when the maturity of long-term bonds is sufficiently high.
JEL Classification: F34, H63 Length: 47 pages Original Release Date: October 31, 2023 Copyright 2023, The Authors