pricing corporate debt allowing for credit risk

Discussion in 'SP5' started by uktous, Aug 14, 2009.

  1. uktous

    uktous Member

    hi,

    according to chapter12 page 24,
    if we use those 2 simultaneous equations and
    know the value of equity at time 0 (Eo) and standard derivation of equity price, then we can determine the value of the company asset at time 0 (Vo) and the standard derivation of the value of company asset.

    I can't find any related example about it, so I hope you can give me some idea about how to solve Vo and the standard derivaton of V0

    Suppose Eo is 3 millian, the standard derivation of Eo is 80%, the value of debt to be repaid in 1 year time is 10 millian, riskfree rate is 5%,

    what is Vo and its standard derivation?
    I have no idea about how to find them....because I solve eliminate "alpha d2"
    I would be much appeciated if you could write down few steps for me

    I put those 2 equations below here

    [​IMG]


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    Last edited by a moderator: Aug 14, 2009
  2. uktous

    uktous Member

    or...it is impossible to calculate....
     

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