Question: A zero-coupon bond has par value $95 and one year to maturity, at which time it may default. From Merton's model, you estimate that the

  1. A zero-coupon bond has par value $95 and one year to maturity, at which time it may default. From Merton's model, you estimate that the risk-neutral probability of default to be 20% and the present value of recovery to be $51. Find percentage of par value that will be recovered in the event of default at maturity, given risk-free interest rate of 5%.

a.

56.44%

b.

51%

c.

55.37%

d.

53.68%

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