This preview shows page 1. Sign up to view the full content.
Unformatted text preview: SPY INVESTMENT (USD) The Black-Scholes-Merton equation for the value of the equity is
Equity (V , t ) = VN (d1 ) − Be −r (T −t ) N (d2 )
d1 = 1
ln(V /B )+ r + 2 σ 2 (T −t )
σ T −t
Fixed Income VI: R. J. Hawkins and √
d2 = d1 − σ T − t Econ 136: Financial Economics 6/ 22 Risky Debt
Equity VALUE OF FIRM (USD) 250 Debt (D) is the ﬁrm value less
the value of the equity (a call
option on the value of the ﬁrm
struck at the level of the debt
payment B .) 200
0 50 100 150 200 250 300 VALUE OF FIRM (USD) The Black-Scholes-Merton equation for the value of the debt is
D (V , t ) = V − VN (d1 ) − Be −r (T −t ) N (d2 )
= V [1 − N (d1 )] + Be −r (T −t ) N (d2 ) = VN (−d1 ) + Be −r (T −t...
View Full Document
This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.
- Fall '08