CHAPTER_23 - assets, with an exercise price equal to the...

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1 CHAPTER 23 Credit Risk and the Value of Corporate Debt Answers to Problem Sets 1. Promised yield = 12.72%; expected yield = 9.37%. 2. a. Increase b. Increase 3. Put option on company’s assets with an exercise price equal to the face value of the bond. 4. A’s probability is .0058, or .58%. B’s is worse at .015, or 1.5%. 5. The expected growth in the market value of the assets, the face value and maturity of the debt, and the variability of future asset values. (In practice, compromises need to be made if, for example, the company has issued bonds with different maturities.) 6. 73.02% (from Table 23.4); 8.85%. 7. Both bonds are more likely to be down rated. 14. We can consider the value of equity to be the value of a call on the firm’s
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Unformatted text preview: assets, with an exercise price equal to the payment due to the bondholders. For Backwoods, the exercise price is $1,090. Also: P = 1200 = 0.45 t = 1.0 r f = 0.09 0.1802 ) 1.0 (0.45 0.6302 t d d 0.6302 /2 ) 1.0 (0.45 ) 1.0 )]/(0.45 1090/1.09 log[1200/( /2 t t X)]/ log[P/PV(E d 1 2 1 1 = = = = + = + = N(d 1 ) = N(0.6302) = 0.7357 N(d 2 ) = N(0.1802) = 0.5714 Call value = [N(d 1 ) P] [N(d 2 ) PV(EX)] 2 = [0.7357 1200] [0.5714 1000)] = $311.36 Thus, the value of equity is $311. With an asset market value of $1,200, the market value of debt is: $1,200 $311 = $889...
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This note was uploaded on 05/09/2011 for the course FNAN 522 taught by Professor Wilson during the Spring '11 term at University of Louisiana at Lafayette.

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CHAPTER_23 - assets, with an exercise price equal to the...

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