THE JOURNAL OF FINANCE
VOL. LI, NO. 3
Optimal Capital Structure, Endogenous
Bankruptcy, and the Term Structure of
HAYNE E. LELAND and KLAUS BJERRE TOFT*
T his article examines the optimal capital structure of a f irm that
American Finance Association
Corporate Debt Value, Bond Covenants, and Optimal Capital Structure
Author(s): Hayne E. Leland
Source: The Journal of Finance, Vol. 49, No. 4 (Sep., 1994), pp. 1213-1252
Published by: Wiley for the American Finance Association
Due: 6/7, Friday, 12pm
Note: This homework is optional for seniors. You may submit the homework
either in Thursday during (the last) lecture, or email the le to me. Please do NOT
put it in my mailbox, since I will start summer travel an
1. (i) Let N be a Poisson process with constant parameter . That is, N0 = 0, N
has independent increments, and lP(Ns Nt = k ) =
Denote 0 := 0,
n := inf cfw_t : Nt n, and En := (n n1 ), n 1. Show that E1 , E2
Homework 2 Solutions
1. Consider the following extension of the Mertons model. The rms asset value
V is as in Mertons model:
rt = r,
dVt = Vt rdt + dWt .
However, the debt is split into senior and junior debt with face values DS and DJ ,
Homework 1 Solution
1. Consider the following Ho-Lee model:
drt = tdt + dWt .
where W is a Brownian Motion under the risk neutral measure lP .
(i) Use the formula p(t, T ) = I lP e t rs ds to nd p(t, T ).
(ii) Apply Ito formula to check