Q.2674 Given the following information about a firm, calculate its probability of default using the Merton model: | Value of the firm | $40 million | |-------------------|-------------| | Outstanding Debt | $25 million | | Maturity of Debt | 5 years | | Interest Rate | 7% | | Volatility of the Firm | 30% | | Expected return of the firm | 10% | | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

The Merton model for Probability of Default is:

PD = N\left[\frac{\ln(F) - \ln(V) - (\mu)(T - t) + 0.5\sigma^2(T - t)}{\sigma\sqrt{T - t}}\right]

= N\left[\frac{\ln(25) - \ln(40) - (0.10)(5) + 0.5 \times 0.3^2(5)}{0.3\sqrt{5}}\right]

= N(-1.11)

= 13.33\%

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Q.2674 Given the following information about a firm, calculate its probability of default using the Merton model:

Value of the firm `$40` million
Outstanding Debt `$25` million
Maturity of Debt 5 years
Interest Rate 7%
Volatility of the Firm 30%
Expected return of the firm 10%

Value of the firm	`$40` million
Outstanding Debt	`$25` million
Maturity of Debt	5 years
Interest Rate	7%
Volatility of the Firm	30%
Expected return of the firm	10%

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Last updated: July 5, 2026 at 07:14

10.98%

12.12%

13.33%

14.76%

Financial Risk Manager Part 2

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Q.2674 Given the following information about a firm, calculate its probability of default using the Merton model:

Value of the firm `$40` million
Outstanding Debt `$25` million
Maturity of Debt 5 years
Interest Rate 7%
Volatility of the Firm 30%
Expected return of the firm 10%

Financial Risk Manager Part 2

Get started today

Comments (0)

Get started today

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Q.2674 Given the following information about a firm, calculate its probability of default using the Merton model: Value of the firm$40 millionOutstanding Debt$25 millionMaturity of Debt5 yearsInterest Rate7%Volatility of the Firm30%Expected return of the firm10%

Q.2674 Given the following information about a firm, calculate its probability of default using the Merton model:

Value of the firm `$40` million
Outstanding Debt `$25` million
Maturity of Debt 5 years
Interest Rate 7%
Volatility of the Firm 30%
Expected return of the firm 10%