Birchler, Urs W.; Hancock, Diana - Federal Reserve Board (Board of Governors of the … - 2003
We provide evidence that a bank's subordinated debt yield spread is not, by itself, a sufficient measure of default … risk. We use a model in which subordinated debt is held by investors with superior knowledge ("informed investor hypothesis …"). First, we show that in theory the yield spread on subordinated debt must compensate investors for expected loss plus give …