Credit risk evaluation of investment corporation bonds

In the present study, we use the concept of the straight coupon bond pricing model proposed by Tsuda (2006) to estimate a price evaluation model for investment corporation bonds: bonds issued by investment corporations for the purpose of raising funds. This model obtains credit risk information, such as default probability, from the market prices of bonds. The model simultaneously estimates implied default probability and recovery rate through comparison of the price fluctuation structure of issues. The market value of properties poses a problem since, as a general rule, real estate has low liquidity and transaction prices are not published. However, because investment corporations that issue investment corporation bonds proactively disclose information (property acquisition prices, NOI, etc.) about owned properties that serve as collateral assets, we can estimate the recovery rate from this information. Then, from market price data for investment corporation bonds, we can obtain new information, including the term structure of default probability for each bond rating and the validity of the pricing model.