You are applying the standard Merton model to the following data : Today's asset value: 1000 Asset
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Question:
You are applying the standard Merton model to the following data:
Today's asset value: 1000
Asset growth rate : 0.1
Asset volatility : 0.25
Liabilities: 600
Maturity: 1 year
(i) Determine the default probability
(ii) Determine the asset volatility that would lead to a default probability of 5% (keep the values of the other variables constant).
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