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A Model for Corporate Debt Maturity Decisions

Published online by Cambridge University Press:  19 October 2009

James R. Morris
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Whenever the firm must borrow funds, it must also decide maturity of the new debt. Yet, the decision models which have dealt with the debt maturity decision have done so almost incidentally, as an extension of the decision to exercise the call provision on outstanding bonds ([6], [10], [23]). There has been little direct examination of the corporate debt maturity decision. In an attempt to fill this gap, this paper is an exploration of the debt maturity decision for a firm which is concerned with minimizing the present value of the expected costs of borrowing. This paper develops a discrete dynamic programming model of the debt maturity decision, in a world where interest rates follow a finite Markov process, and where the yield curve is formed from expectations regarding the future course of interest rates. With this optimization model, the influence on the debt maturity strategy of variables such as flotation costs and liquidity premiums will be explored. There will be no consideration of the risks associated with alternative borrowing strategies.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 3 , September 1976, pp. 339 - 357
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

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