# Question

The value of a company’s equity is $4 million and the volatility of its equity is 60%. The debt that will have to be repaid in two years is $15 million. The risk-free interest rate is 6% per annum. Use Merton’s model to estimate the expected loss from default, the probability of default, and the recovery rate (as a percentage of the no-default value) in the event of default. (Hint: The Solver function in Excel can be used for this question.)

## Answer to relevant Questions

A portfolio manager has maintained an actively managed portfolio with a beta of 0.2. During the last year, the risk-free rate was 5% and major equity indices performed very badly, providing returns of about −30%. The ...Extend Example 20.3 to calculate CVA when default can happen in the middle of each month. Assume that the default probability during the first year is 0.001667 per month and the default probability during the second year is ...Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year if a certain company’s ...The worksheet used to produce Figure 23.2 is on the author’s web site. How does the loss distribution change when the loss severity has a beta distribution with upper bound of 5, lower bound of zero, and the other ...Suppose that daily gains (losses) are normally distributed with standard deviation of $5 million. (a) Estimate the minimum regulatory capital the bank is required to hold. (Assume a multiplicative factor of 4.0.) (b) ...Post your question

0