This papers introduce in this study a model of sovereign debt with default threshold. Specifically, we apply features of a barrier option to interpret behavior of creditors as well as debtors of a sovereign debt. The model addresses both the forgiveness and default penalty issues brought forward in the seminal study of Bulow and Rogoff (1989b). Under our model, it pays for a creditor to forgive partially what is owed by the debtor, and the more a sovereign debt is forgiven the more it values. Similarly, mutually agreed and predetermined default penalty on defaults makes a sovereign debt worth more, and the more a default is penalized the more valuable the debt is. The existence of a default threshold is capable of explaining the observed pricing asymmetry in sovereign debt as our empirical results show that yields respond more to debt-to-GDP ratio when the ratio is above a certain threshold than below it and this asymmetry gets stronger as time to maturity shortens. The analysis benefits investment decisions of fixed income portfolio, as well as intertemporal diversifications of international investments.