Onyx Corporation has a $200,000 loan that will mature in one year.The risk free interest rate is 6 percent.The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent).The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406. What is the required yield on this risky loan?

Question

Quizplus · Accepted Answer

The required yield on the risky loan can be calculated using the Black-Scholes option pricing model for debt. The yield is calculated as the risk-free rate plus the credit spread, which is derived from the values of N(h1) and N(h2). The yield is approximately 6.165 percent.

Onyx Corporation Has a $200,000 Loan That Will Mature in One