This paper addresses an issue central to the estimation of discount rates for capital budgeting: ... more This paper addresses an issue central to the estimation of discount rates for capital budgeting: should the geometric mean or arithmetic mean of past data be used when estimating the discount rate? the use of the arithmetic mean ignores estimation error and serial correlation in returns. Unbiased discount factors have been derived that correct for both these effects. In all cases, the corrected discount rates are closer to the arithmetic than the geometric mean.
Page 1. THE JOURNAL OF FINANCE . VOL. XXXI, NO. 4 . SEPTEMBER 1976 ESTIMATION AND USES OF THE TER... more Page 1. THE JOURNAL OF FINANCE . VOL. XXXI, NO. 4 . SEPTEMBER 1976 ESTIMATION AND USES OF THE TERM STRUCTURE OF INTEREST RATES WILLARD T. CARLETON* AND IAN A. COOPER* I. INTRODUCTION ...
The modelling of default risk in debt securities involves making assumptions about the stochastic... more The modelling of default risk in debt securities involves making assumptions about the stochastic process driv- ing default, the process generating the write-down in default, and risk-free interest rates. Three generic approaches have been used. The first relies on modelling the value of the assets on which the debt is written. The second involves modelling default as an arrival process. The third involves directly modelling the interest rate spreads to which default gives rise. Each of these approaches may be applied to the impact of default risk on derivative products such as swaps and options. One application is to the valuation of derivative products that may default. The other is to the new class of ‘credit derivatives’ that represent derivative products written on credit risk.
For much of the past century, there has been an increased tendency for large infrastructure proje... more For much of the past century, there has been an increased tendency for large infrastructure projects to be funded and operated by governments. Since the early 1980s, however, private-sector financing and management of such projects have experienced a dramatic revival. In some cases, this revival has taken the form of the “privatization” of an entire industry. But another, increasingly common, form has been the use of project finance to fund instrastructure investments. Besides being widely used in infrastructure investments like telecommunications and power generation in developing countries, the use of project finance has recently been extended by the U.K.'s Private Finance Initiative to fund public enterprises as diverse as the construction and operation of prisons, hospitals, subway cars, and the National Insurance computer system.In a project financing, the project is managed by a separate company that is owned by a project sponsor (or sponsors) who usually takes an active role in the management of the project. The project company enters into a complex series of contracts with multiple parties, including the host government, the project's customers and suppliers, and the banks that typically provide most of the debt financing.This paper argues that the equity investment by the project's operators works together with high debt ratios and the web of contractual arrangements to reduce “agency” problems in the management of large projects. It also shows how the contracts shift the various project risks to those parties best able to appraise and control them. Finally, it discusses why most project financing takes the form of limited recourse bank loans to the project company rather than, say, public bonds with full recourse to the sponsors.
This paper addresses an issue central to the estimation of discount rates for capital budgeting: ... more This paper addresses an issue central to the estimation of discount rates for capital budgeting: should the geometric mean or arithmetic mean of past data be used when estimating the discount rate? the use of the arithmetic mean ignores estimation error and serial correlation in returns. Unbiased discount factors have been derived that correct for both these effects. In all cases, the corrected discount rates are closer to the arithmetic than the geometric mean.
Page 1. THE JOURNAL OF FINANCE . VOL. XXXI, NO. 4 . SEPTEMBER 1976 ESTIMATION AND USES OF THE TER... more Page 1. THE JOURNAL OF FINANCE . VOL. XXXI, NO. 4 . SEPTEMBER 1976 ESTIMATION AND USES OF THE TERM STRUCTURE OF INTEREST RATES WILLARD T. CARLETON* AND IAN A. COOPER* I. INTRODUCTION ...
The modelling of default risk in debt securities involves making assumptions about the stochastic... more The modelling of default risk in debt securities involves making assumptions about the stochastic process driv- ing default, the process generating the write-down in default, and risk-free interest rates. Three generic approaches have been used. The first relies on modelling the value of the assets on which the debt is written. The second involves modelling default as an arrival process. The third involves directly modelling the interest rate spreads to which default gives rise. Each of these approaches may be applied to the impact of default risk on derivative products such as swaps and options. One application is to the valuation of derivative products that may default. The other is to the new class of ‘credit derivatives’ that represent derivative products written on credit risk.
For much of the past century, there has been an increased tendency for large infrastructure proje... more For much of the past century, there has been an increased tendency for large infrastructure projects to be funded and operated by governments. Since the early 1980s, however, private-sector financing and management of such projects have experienced a dramatic revival. In some cases, this revival has taken the form of the “privatization” of an entire industry. But another, increasingly common, form has been the use of project finance to fund instrastructure investments. Besides being widely used in infrastructure investments like telecommunications and power generation in developing countries, the use of project finance has recently been extended by the U.K.'s Private Finance Initiative to fund public enterprises as diverse as the construction and operation of prisons, hospitals, subway cars, and the National Insurance computer system.In a project financing, the project is managed by a separate company that is owned by a project sponsor (or sponsors) who usually takes an active role in the management of the project. The project company enters into a complex series of contracts with multiple parties, including the host government, the project's customers and suppliers, and the banks that typically provide most of the debt financing.This paper argues that the equity investment by the project's operators works together with high debt ratios and the web of contractual arrangements to reduce “agency” problems in the management of large projects. It also shows how the contracts shift the various project risks to those parties best able to appraise and control them. Finally, it discusses why most project financing takes the form of limited recourse bank loans to the project company rather than, say, public bonds with full recourse to the sponsors.
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