The literature on default-claim pricing falls into three categories. Building on the classical Merton model, the structural approach models the dynamics of the asset value and assumes that default is triggered when the equity value reaches an exogenous asset level. In a second class of...

In this paper, we propose a theoretical continuous-time model to analyze the impact of liquidity on bond prices. This model prices illiquid bonds relative to liquid bonds and provides a testable theory of illiquidity induced price discounts. The model is tested using 1992–1994 data from bonds...