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.
For the first eight problems, assume that a firm has assets of $100, with σ = 40%, α = 15%, and δ = 0. The risk-free rate is 8%.