Multiple Choice
Suppose that the asset value of a firm evolves according to a lognormal diffusion, as in Merton (1974) . The current value of the firm's assets is $100 million, and its volatility is 24.24%. 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. What is the risk-neutral probability of the firm defaulting at maturity of the debt?
A) 17.12%
B) 19.23%
C) 20.02%
D) 21.22%
Correct Answer:
Verified
Correct Answer:
Verified
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