HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company...
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HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company under Merton's structural model, based on has the following information: The value of the company's equity is 3 million USD. The volatility of its equity is 70%. The principal of the debt is 10 million USD and has maturity 1 year (B = 10). The risk free rate is 5%. (a) Determine the values of V and Oy. (b) Using your calculation in (a), compute the one year probability of default. (c) Using your previous calculations, determine the price of the defaultable bond B(0,1). (d) Calculate the corresponding credit spread s (0,1). (e) Calculate the expected value of the recovery rate conditional on default. (f) Compute Q(R > 80% | V < B) and Q(R < 50% | V < B). HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company under Merton's structural model, based on has the following information: The value of the company's equity is 3 million USD. The volatility of its equity is 70%. The principal of the debt is 10 million USD and has maturity 1 year (B = 10). The risk free rate is 5%. (a) Determine the values of V and Oy. (b) Using your calculation in (a), compute the one year probability of default. (c) Using your previous calculations, determine the price of the defaultable bond B(0,1). (d) Calculate the corresponding credit spread s (0,1). (e) Calculate the expected value of the recovery rate conditional on default. (f) Compute Q(R > 80% | V < B) and Q(R < 50% | V < B).
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To solve this exercise well follow the steps outlined in Mertons structural model a Determine the values of Vo and b Using the calculation from a comp... View the full answer
Related Book For
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
Posted Date:
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