The following facts about a company are known: 1. At present, its total capital is £3 million. 2. It has just sold zero-coupon bonds with the total nominal value of £2 million which it promises to repay in 18 months from now. 3. The total capital F(t) of the company follows the geometric Brownian motion with parameters µ = 0.15 and σ = 0.2. The continuously compounded annual interest rate r = 6%. Within the framework of the Merton model, establish the following. (c)What is the probability that the company would default on its promise to bond holders?
The following facts about a company are known: 1. At present, its total capital is £3 million. 2. It has just sold zero-coupon bonds with the total nominal value of £2 million which it promises to repay in 18 months from now. 3. The total capital F(t) of the company follows the geometric Brownian motion with parameters µ = 0.15 and σ = 0.2. The continuously compounded annual interest rate r = 6%. Within the framework of the Merton model, establish the following. (c)What is the probability that the company would default on its promise to bond holders?
Chapter6: Exponential And Logarithmic Functions
Section: Chapter Questions
Problem 8RE: Suppose an investment account is opened with aninitial deposit of 10,500 earning 6.25...
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The following facts about a company are known:
1. At present, its total capital is £3 million.
2. It has just sold zero-coupon bonds with the total nominal value of £2 million which it promises to repay in 18 months from now.
3. The total capital F(t) of the company follows the geometric Brownian motion with parameters µ = 0.15 and σ = 0.2.
The continuously compounded annual interest rate r = 6%. Within the framework of the Merton model, establish the following.
(c)What is the
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