THE RELATIVE PRICING OF HIGH-YIELD DEBT - THE CASE OF RJR-NABISCO HOLDINGS CAPITAL CORPORATION

We derive and investigate empirically arbitrage pricing restrictions a mong three bonds of RJR Nabisco Holdings Capital Corporation. The thre e RJR bonds are virtually identical in all respects, except for the fo rm in which interest is paid. We document large and persistent errors in the market pricing of the three bonds over a two-year period. The c ash-paying bond was consistently more expensive than either the pay-in -kind or deferred-coupon bonds. The magnitude of the pricing errors is too large to be explained by market imperfections.