Valuation of Interest Payment Guarantees on Developing Country Debt

The cost of interest payment guarantees is difficult to evaluate because guarantees are a contingent obligation that become effective only if a certain condition is met (that is, the debtor fails to make a certain payment). In this paper a technique to value interest payment guarantees on developing country debt is developed and preliminary estimates are presented. Using results from option pricing theory, the market price that an interest payment guarantee would have if it were traded in financial markets is estimated from the characteristics of secondary market prices of developing country debt.