Explanation:
Using Merton formula:
Where
σ is the asset value volatility,
N is the probability of the standard normal density function,
F = face value of the bond
V = value of the firm
T = maturity on the bond
μ = expected rate of return
We get the above figure by checking the N value in the normal distribution table.
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Q.3054 The assets of company X are currently worth $1,300,000. In three months the company has to repay $1,000,000 in debt. The expected volatility of the assets is 30% and the expected rate of return on the value of the firm is 15%. What is the probability of default in three months on the basis of the Merton model? Click here to see the standard normal table.
A
2.74%
B
1.77%
C
6.16%
D
5.61%
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