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1. (20 pts) Credit risk measures using the structural model: assume a company has the following...

1. (20 pts) Credit risk measures using the structural model: assume a company has the following characteristics.

Time t value of the firm’s assets: At = $4,000

Expected return on assets: u = 0.05 per year

Risk-free rate: r = 0.03 per year

Face value of the firm’s debt: K = $2,000

Time to maturity of the debt (tenor): T – t = 1 year

Asset return volatility: σ = 0.35 per year

(a) Calculate the probability that the debt will default over the time to maturity.

(b) Calculate the expected loss.

(c) Calculate the present value of the expected loss.

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