The Impact of Breaking Rigid-Payment Promise on the Pricing of Corporate Bonds:An Empirical Study Based on the Default Event of Bond 112061

Abstract

Abstract:

Bond 112061 is the first corporate bond defaulted explicitly in China, which broke long-lasting promise of rigid payment in the bond market. We use the bond samples issued in both Shanghai and Shenzhen exchanges from 2013 through 2015 to test whether the break of rigid-payment promises has changed the pricing of issued bonds fundamentally. Empirical results show that the variables of ownership state and credit rating both increase their power in explaining the variation of credit yields. And the former dominates the increase of the explanatory power. Our findings imply that the break of rigid-payment promises strengthens the perception of default risk by investors as well as the role of implicit guarantee supported by state ownership in bond pricing. Our work is helpful in assessing the impact of the first default event on bond pricing in the issuing market as well the role of implicit guarantee by the government, which provides insightful suggestions on how to develop a healthier bond market in China.

Key words: bond pricing, credit yield, ownership state, credit rating, implicit guarantee

Peng Diefeng, Cheng Xiaoyuan. The Impact of Breaking Rigid-Payment Promise on the Pricing of Corporate Bonds:An Empirical Study Based on the Default Event of Bond 112061[J]. , 2018, 30(12): 3-12.

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