The structural model framework is a parsimonious one, yet needs to accommodate complex capital structures. Which of the following approaches is not a simplification of the complexity of the real-world situation?
A) The nested compound option model for multiple debt maturities.
B) Collapsing debt to a fixed horizon equal to all of short-term debt and a percentage of long-term debt (the KMV approach).
C) Collapsing debt to a single horizon equal to the duration of the outstanding debt of all maturities.
D) None of the above.

Question

Quizplus · Accepted Answer

The nested compound option model is not a simplification, but a more complex approach that considers multiple debt maturities. Choices B and C both collapse debt to simpler forms, simplifying the analysis.

The Structural Model Framework Is a Parsimonious One, Yet Needs