Examlex
Suppose that the asset value of a firm evolves according to a lognormal diffusion, as in Merton (1974) . The current value of the firm's assets is $100 million, and its volatility is 24.24%. Suppose too that the firm has only one issue of debt outstanding: zero-coupon debt with a maturity of three years, and a face value of $70 million. Finally, suppose that the risk-free rate of interest is 4% (continuously-compounded terms) for all maturities. What is the risk-neutral probability of the firm defaulting at maturity of the debt?
Selling Price
The amount of money a buyer pays to purchase a product or service.
Call Option Contract
A financial contract that gives the buyer the right, but not the obligation, to buy an asset at a specified price within a specific timeframe.
Underlying Asset
The financial asset upon which a derivative instrument, such as an option or a futures contract, is based.
Floating-Rate Debt
Floating-rate debt is a type of loan or security that has a variable interest rate, which adjusts periodically based on a benchmark or index rate.
Q1: In the Black-Derman-Toy (BDT) model, short rates
Q1: Any event that follows the occurrence of
Q6: The continuously-compounded forward-interest-rate curve for euros lies
Q10: A criminological learning theory that emphasizes social
Q11: Thornberry argued that social control and learning
Q14: Describe the ways you will integrate music
Q15: A number of companies were accused of
Q16: Early care and learning programs are generally
Q17: Assume annual compounding. The one-year and
Q25: Equity and debt in a firm are