Valuing corporate securities: some effects of bond
indenture provisions—a correction
Published online: 13 August 2007
Ó Springer Science+Business Media, LLC 2007
Abstract This paper identiﬁes and corrects a typographical error in Black and Cox (J
Finance 31:351–367, 1976). While the typographical error is seemingly trivial, the mag-
nitude of the pricing error that it generates can be substantial.
Keywords Default Á Bond price
JEL Classiﬁcations D46 Á G32
Black and Cox (1976) derive a model for debt default, where the default barrier is
exponential. This seminal model is widely used both by academics and practitioners.
manuscript documents the existence of a small typographical error in the Black–Cox
pricing formula. As will be demonstrated, the seemingly innocuous typographical error can
lead to large discrepancies in debt values. A brief conversation with Professor John Cox
brought to our attention that there was a correct version of the paper printed in Credit Risk
by David Shimko (1999). Yet, we feel that it is important to inform a larger body of
The Black–Cox model assumes, like the Black and Scholes (1973) and Merton (1974)
model, that the ﬁrm value follows the lognormal process:
I would like to thank Professor John Cox, Professor Ren-Raw Chen, and Professor Ben Sopranzetti for their
encouragements and valuable suggestions. All errors are my responsibility.
H.-C. Lin (&)
Department of Accounting and Graduate Institute of Finance and Banking, National Cheng Kung
University, No.1, University Road, Tainan 701, Taiwan
In order to exhibit the importance of Black and Cox (1976), the statistic of how many times this paper has
been cited in the literature is presented in Table 1.
The notation here is the same as that deﬁned in Black and Cox (1976).
Rev Quant Finan Acc (2007) 29:173–180