Question 1

Based on your understanding of structural models of default,equity holders are better off when,holding all else constant

Accepted Answer

A) The volatility of the firm's assets increases. 
B) The value of the firm's assets decreases. 
C) The debt maturity is shorter. 
D) All of the above. 
A) The volatility of the firm's assets increases. 
B) The value of the firm's assets decreases. 
C) The debt maturity is shorter. 
D) All of the above.

Question 2

Which of the following scenarios is most likely to lead to an increase in a firm's credit spreads?

Accepted Answer

A) The firm's assets increase in value and the volatility of its assets also increases. 
B) The firm's assets increase in value and the volatility of its assets decreases. 
C) The firm's assets decrease in value and the volatility of its assets increases. 
D) The firm's assets decrease in value and the volatility of its assets decreases. 
A) The firm's assets increase in value and the volatility of its assets also increases. 
B) The firm's assets increase in value and the volatility of its assets decreases. 
C) The firm's assets decrease in value and the volatility of its assets increases. 
D) The firm's assets decrease in value and the volatility of its assets decreases.

Question 3

Suppose the current value of a firm's assets is $100 million,and the value of equity in the firm is $40 million.Suppose too that the firm has only one issue of debt outstanding: zero-coupon debt with a maturity of three years,and a face value of $70 million.Finally,suppose that the risk-free rate of interest is 4% (continuously-compounded terms)for all maturities.Assuming that firm value evolves according to a lognormal diffusion (as in Merton,1974),what is the volatility of the firm's assets?

Accepted Answer

A) 10.0% 
B) 19.2% 
C) 24.2% 
D) 35.4% 
A) 10.0% 
B) 19.2% 
C) 24.2% 
D) 35.4%

Question 4

Equity and debt in a firm are option-like.Which of the following options are they?

Accepted Answer

A) Equity is akin to a short call and debt is akin to a package containing a long put. 
B) Equity is akin to a long call and debt is akin to a package containing a short put. 
C) Equity is akin to a short put and debt is akin to a package containing a long call. 
D) Equity is akin to a long put and debt is akin to a package containing a short call. 
A) Equity is akin to a short call and debt is akin to a package containing a long put. 
B) Equity is akin to a long call and debt is akin to a package containing a short put. 
C) Equity is akin to a short put and debt is akin to a package containing a long call. 
D) Equity is akin to a long put and debt is akin to a package containing a short call.

Question 5

In Altman's Z-score model,which of the following variables has a negative coefficient in the discriminant function that comes out of the model? (A negative coefficient would mean that the Z-score is decreasing in the variables. )

Accepted Answer

A) Working Capital/Total Assets 
B) Market Value of Equity/Book Value of Debt 
C) Sales/Total Assets 
D) None of the above. 
A) Working Capital/Total Assets 
B) Market Value of Equity/Book Value of Debt 
C) Sales/Total Assets 
D) None of the above.

Based on your understanding of structural models of default,equity holders are better off when,holding all else constant

Which of the following scenarios is most likely to lead to an increase in a firm's credit spreads?

Equity and debt in a firm are option-like.Which of the following options are they?

In Altman's Z-score model,which of the following variables has a negative coefficient in the discriminant function that comes out of the model? (A negative coefficient would mean that the Z-score is decreasing in the variables. )

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise/Put-Call Parity

Option Pricing: An Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Currency and Commodity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton Hjmand Libor Market Model LMM

Credit Derivative Products

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters

Exam 30: Structural Models of Default Risk

Based on your understanding of structural models of default,equity holders are better off when,holding all else constant

Which of the following scenarios is most likely to lead to an increase in a firm's credit spreads?

Equity and debt in a firm are option-like.Which of the following options are they?

In Altman's Z-score model,which of the following variables has a negative coefficient in the discriminant function that comes out of the model? (A negative coefficient would mean that the Z-score is decreasing in the variables. )

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise/Put-Call Parity

Option Pricing: An Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Currency and Commodity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton Hjmand Libor Market Model LMM

Credit Derivative Products

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters