200 150 100 50 0 0 50 100 150 200 250 300 value of

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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 ) where 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 300 Value 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 .) 200 150 100 50 0 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...
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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.

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