Consider a firm whose value of assets is V0=100 at t=0. The firm issues a 2-year zero-coupon
Fantastic news! We've Found the answer you've been seeking!
Question:
Consider a firm whose value of assets is V0=100 at t=0. The firm issues a 2-year zero-coupon bond with face value, F=90 at t=0. The continuously-compounded, annualized risk-free rate is r=3%, and the continuously-compounded, annualized expected return on assets is 6%. The daily volatility of the firm's assets value is 0.9%. What is the annualized volatility of the firm's assets' value? Assume there are 252 business days in a year. What is the probability of default for the firm at t=2 when the zero coupon bond matures. Compute this probability using the Merton model.
Related Book For
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee
Posted Date: