Pricing of Defaultable Bonds with Log-Normal Spread: Development of the Model and an Application to Argentinean and Brazilian Bonds During the Argentine Crisis.

In this paper we describe a two-factor model for a defaultable discount bond, assuming log-normal dynamics with bounded volatility for the instantaneous short rate spread. Under some simplified hypothesis, we obtain an explicit barrier-type solution for zero recovery and constant recovery. We also present a numerical application for Argentinean and Brazilian Sovereign Bonds during the default crisis of Argentina. [ABSTRACT FROM AUTHOR]