| dc.description.abstract | In this thesis a model is developed for valuing risky perpetual debt with an embedded
American call option that can be exercised after a protection period. These features are
relevant for a hybrid capital instrument typically issued by banks and other financial
institutions, partly as an outcome of regulatory requirements. There exist a large market for
this instrument, the outstanding amount of hybrid capital securities was $ 376 billion in 2005
(Mjøs and Persson, 2007). The model is based on a model by Mjøs and Persson (2010)
where similar debt is valued, but where as a simplification the option is assumed to be a
European type of option. Market practice indicates that this hybrid capital instrument is
issued with an American option and a step-up coupon rate, in this sense the model developed
in this thesis is more realistic than Mjøs and Persson’s model because it incorporates these
characteristics. An important result from this thesis is that the value of risky perpetual debt
with an embedded American call option differs from the value of similar debt with a
European call option. This is interesting because considering market practice and the
characteristics of the two options would imply otherwise. | en |
