Senior debt and incentive effects of junior debt
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    Abstract:

    A model of incentive effects of senior debt and junior debt is developed in the paper , in which both the rate of inflation and the rate of dividend yield are incorporated. Using the method of the game theory analysis of op2 tions , the analytic valuation formulas of the senior debt , junior debt , equity and firm , respectively , is presented in the paper. The paper discuss that the effect of the rate of inflation and the rate of dividend yield on the firm’s bankruptcy decision , the firm’s decision to issue junior claims and this wealth transfer between the debt holders and the equity holder , respectively. In order to demonstrate that the rate of inflation and the rate of dividend yield can2 not be neglected in borrow2lend contracts.

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