Consider the following case study from Berk and DeMarzo's Corporate Finance.

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My question is about the first sentence in the last paragraph:

Assume that participation in the swap was voluntary (as was claimed at the time), so that on the announcement the price of the existing bonds equaled the value of the new bonds.

How do we come to the conclusion that the price of the existing bonds equaled the value of the new bonds? I had thought that maybe we were arguing that each have the same underlying expected payout and risk profile and therefore the same price, but it's not clear why they should have the same expected payout when there are different promised cash flows in each case. I think perhaps it has something to do with the voluntary nature of the swap, but I can't understand what or why.

1 Answer 1


The thing is worth what someone is willing to pay for it. The voluntary nature of the swap means that the investors could instead have sold their holdings elsewhere for a different consideration. Given that they could not realistically do that means that the value of their holdings was capped by what was offered.

  • I am not sure I follow. You are saying that holders of Greek debt had the option to swap and, therefore, that their debt was worth at the very least the value of the new bond instruments being offered (if it was worth any less then they could get more value by doing the swap). This puts a lower bound on their instruments, but why does it place an upper bound too?
    – EE18
    Commented Dec 5, 2023 at 4:03
  • 1
    @EE18 because while theoretically they had a choice - the fact is that they couldn't find any better option. Think about it - why would anyone buy defaulted bonds from them? The government already said they won't pay them.
    – littleadv
    Commented Dec 5, 2023 at 4:09

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