Credit risk measures using the structural model: assume a company has the following characteristics. Time...

Credit risk measures using the structural model: assume a company has the following characteristics.
   Time t value of the firm’s assets:   At = $3,000
   Expected return on assets: u = 0.05 per year
   Risk-free rate: r = 0.02 per year
   Face value of the firm’s debt: K = $2,000
   Time to maturity of the debt (tenor): T – t = 1 year
   Asset return volatility: σ = 0.35 per year

What is the present value of the expected loss? (Select the answer that most closely matches the results of your calculations.)

	A.	$40.591
	B.	$45.591
	C.	$48.985

What is the expected loss? (Select the answer that most closely matches the results of your calculations.)

	A.	$39.525
	B.	$47.612
	C.	$35.520

What is the probability that the debt will default over the time to maturity? (Select the answer that most closely matches the results of your calculations.)

14.11%

9.07%

12.92%

Solutions

Expert Solution

What is the present value of the expected loss?
Answer - (B) $45.591

What is the expected loss?
Answer - (A) $39.525

What is the probability that the debt will default over the time to maturity?
Answer - (C) 12.92%

Explanation -

Rahul Sunny answered 2 years ago

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