Suppose that there is a 3%per year chance that the firms asset value can jump to zero.

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Suppose that there is a 3%per year chance that the firm’s asset value can jump to zero.
Assume that the firm issues 5-year zero-coupon debt with a promised payment of $110. Using the Merton jump model, compute the debt price and yield, and compare to the results you obtain when the jump probability is zero.
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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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