The Determinants of the Secondary Market Price of Less Developed Countries' Debt

Abstract

A present-value model of less developed countries' (LDC) debt is developed to understand the factors that affect the discount on the secondary market. LDC debt trades at a substantial discount on the secondary market. This paper investigates the determinants of the discount for a sample of 13 countries over a 9 year period. The findings show that debt-exports, foreign currency reservesimports and total debt service to exports ratios are significant determinants of the secondary market prices of LDC debt. The discount is higher in countries where debt-exports ratios are higher and is lower for those with lower foreign currency reserves-imports ratios. Concentration of debt with money center banks has a positive and significant effect on the secondary market price of debt.