A company has assets of $400,000 and total debts of $160,000. Using an option pricing model, the implied volatility of the firm’s assets is estimated as 20 percent. Using Merton’s model (KMV type), estimate the firm’s expected default risk.

What is the probability of default (PD)? Why is the estimation of PD important?

Answer rating: 100% (QA)

The expected default risk of the firm is 4 percent The firms equity value is 400000 160000 240000 Th... View the full answer