Pricing Model of Small-Medium Enterprise Mutual Guarantee Bonds with Unexpected Defaults

In many countries, small and medium-sized enterprises (SMEs) are the principal generators of new jobs and economic activity. If guarantee funds are to be effective, a majority of firms can obtain financial assistance through corporate bonds market. This paper describes the mutual guarantee bond which can be a viable solution to the problem of access to credit from capital market for small and middle-entrepreneurs. This work uses a jump diffusion process to estimate the price of mutual guarantee bonds made under the terms of the China Small Business Financing Program. First, a logistic structural model of mutual guarantee bond is built up. The model was then employed to design the logical pricing model of credit spread when an exogenous default process jumps for the first time. A geometrical attenuation function is introduced to reflect the unexpected default of intensities. Furthermore, the pricing model of collective small-medium corporate bonds as the spot interest rate is assumed to follow Vasicek model. Finally, the work tests the pricing model with one thousand times Monte Carlo methods and offer theoretical background and empirical evidence for further financial innovation as well.