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Research Article

Bond Rating Prediction Using the Option Approach

Kang, Hyoseok · Lee, Hanseok

Hankuk University of Foreign Studies

Published: January 1989 · Vol. 19, No. 1 · pp. 89-112
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Abstract

Bond ratings should be evaluated based on the insolvency risk of the issuing firm, and the degree of insolvency risk can be objectively measured using option models. This study proposes an option approach as a new attempt at bond rating prediction and empirically analyzes its predictive power. The results indicate that the option approach demonstrates predictive reliability comparable to that of the conventional rating prediction method based on financial ratios, thereby suggesting the applicability of option models to bond evaluation.