Question

If we have a company with debts A and B, how should we write the default probability of debts A within the setting of Merton Model? Thanks

Answer 1

Merton model

The Merton model is an analysis model used to assess the credit risk of a company's debt. Analysts and investors utilize the Merton model to understand how capable a company is at meeting financial obligations, servicing its debt, and weighing the general possibility that it will go into credit default.

The Merton model provides a structural relationship between the default risk and the asset of a company.

This methods allows for the use of the black scholes merton option pricing model.

For finding the debts we can calculate it from its on tformula