The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70. We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0. The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
Peter Ritchken , Case Western Reserve University Tutorial: Structural Models of the Firm 25/61
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0. The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0. The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0. The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
Peter Ritchken , Case Western Reserve University Tutorial: Structural Models of the Firm 25/61
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0. The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0.
The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
Peter Ritchken , Case Western Reserve University Tutorial: Structural Models of the Firm 25/61
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0.
The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0.
The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
Peter Ritchken , Case Western Reserve University Tutorial: Structural Models of the Firm 25/61
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0.
The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
The Black Cox Bond Example
The value of the equity of a firm is $40.
The firm has a T = 5 year zero coupon bond with face value $70.
We assume the default boundary is C = 54 with γ = 0.
The riskless rate is rf = 0.05.
The firm has no other payouts, so q = 0.
The volatility of the equity is given as σE= 0.40.
Using solver in excel, we can imply out the value of the assets of the firm and the volatility of the assets of the firm.
For these case parameters we find σV = 0.183 and V0= 93.48.
The fair price of the debt is then computed from the Black Cox model to be $53.48 which yields a credit spread of 53.48 basis points.
Peter Ritchken , Case Western Reserve University Tutorial: Structural Models of the Firm 25/61