The Effect Of Varity Guarantees On Bond Pricing

Many bonds have defaulted during less than a year after Chaori bond firstly defaulted at March 2014.A wave of bond defaulting has moved on at Chinese bond market.In order to deal with bond default events,bond investors protect their own interest through security legal system,implicit government guarantee,and implicit business groups guarantee.What are the effect of these varity guarantees on bond investors? Originate from the thinking on this question,we investigated Stock Exchange listed bonds and want to answer this question from three points,such as security legal system,implicit government guarantee,and implicit business groups guarantee.Our main content and conclusion as follows:(1)The effect of third-party guarantee and property assurance on bond pricing.Based on the investigation about listed bond issue during 2008-2013,we find that probability of providing assurance for bond is higher when bond issuers are more risky.Also we find that,third-party guarantee decreases bond issue spread and improves bond issue rating;property assurance increases bond issue spread but has no impact on bond issue rating.This suggests that third-party guarantee is much better than property assurance when risky bond issuers have provided assurance.Because third-party guarantee relieve information asymmetry efficiently,but property assurance just changes way of making use of information advantage for bond issuers.Also we find that the effect of third-party guarantee on information asymmetry is strong when information environment is weak.Our results tell us that third-party guarantee is more beneficial to bond issue than property assurance,especially in weak situation.(2)The effect of implicit government guarantee on bond pricing.State-owned enterprises and local financing platform both have implicit government guarantee.Are there different from their implicit government guarantee? And does their implicit government guarantee have different influence on their financing cost? Based on the investigation about the corporate bonds listed during 2007-2012,we find that implicit government guarantee decreases state-owned enterprises bonds' risk and its credit spread,but increases local financing platform bonds' risk and its credit spread.We also find that implicit government guarantee decreases more state-owned enterprises bonds' risk when bond rating is lower,and implicit government guarantee increases more local financing platform bonds' risk when bond rating is higher.There is different from state-owned enterprises.(3)The effect of implicit business groups guarantee on bond pricing.We find that it decreases credit spread of bond when business groups have higher rating than issuer.We also find that effect of implicit business groups guarantee on bond pricing is strong for issuers with higher default risk,more importance for business groups,worse operating environment and bonds with worse liquidity.Our results are consistent with business groups' propping hypothesis.Our results tell us that business groups can provide groups-affiliated firms bail-out only when business groups have propping ability,then it decreases credit spread.