LEASING AND CREDIT RISK

Despite empirical evidence pointing to a strong similarity between lea se contracts and junk bonds, the theoretical modeling of equilibrium l ease determination has been confined primarily to default-free leases. This paper provides a unified framework for determining the equilibri um credit spread on leases subject to default risk. The model is flexi ble enough to he applied to a wide variety of rear-world leasing struc tures, including security deposits, required up-front prepayments, emb edded lease options, leases indexed to use, and lease credit insurance contracts.