TY - JOUR
AU - VISCIONE, JERRY A.
AB -  THEORETICAL RESEARCH ON THE rational pricing of covenants in corporate bonds has examined seniority and security covenants. Black and Cox [1] and Ho and Singer [8] use the option pricing model to show that senior debt should have a higher price than subordinated debt. Recent studies by Smith and Warner [10, 11] and Warner [13] document the widespread use of security covenants and argue that security reduces yield. Despite the broad concensus that seniority/security covenants should reduce bond yields, ceteris paribus, empirical tests have failed to provide strong support for this view. Rather, prior studies [2,3] have shown that security may actually increase the yield to maturity on debt. The research cited relied on multivariate statistical techniques to examine various factors affecting yields (or prices) within specific rating categories. Contrary findings regarding security were attributed to differences in risk among bonds in the same rating category. The present note is a refinement of past empirical studies. By relying on a different test design, we alleviate difficulties inherent in bond ratings. Specifically, we study matched pairs of nonconvertible bonds, issued by the same company, that have similar features except for seniority/security covenants. Our results support the view that seniority/security 
TI - The Impact of Seniority and Security Covenants on Bond Yields: A Note
JF - The Journal of Finance
DO - 10.1111/j.1540-6261.1984.tb04926.x
DA - 1984-12-01
UR - https://www.deepdyve.com/lp/wiley/the-impact-of-seniority-and-security-covenants-on-bond-yields-a-note-J9saTJXN0I
SP - 1597
VL - 39
IS - 5
DP - DeepDyve
ER -