A MODEL TO DISTINGUISH CREDIT QUALITY OF LATE 19TH-CENTURY RAILROAD BONDS

Abstract

This document presents a model for analyzing the credit quality of long-term railroad bonds from the late 19th and early 20th centuries. The aim is to demonstrate that these bonds could be rated and priced according to their issuers' financial strength and priority of claim. The research assembles financial statement and market data to calibrate the model, and the results suggest that the bonds' credit quality was challenging to evaluate, requiring knowledge of the railroad's claims structure and financial ability to cover required payments. The study utilizes regression analysis, with yield as the dependent variable and financial leverage as an independent variable. The analysis shows that investors valued subordinated claims differently from first-tier claims; subordinated bonds generally had higher yields, reflecting their higher default risks. The research concludes that these bonds' rating information was available in real-time before the invention of bond rating agencies such as Moody’s in 1909, and thus, judging their credit quality was possible by examining the priority of claim