Suppose that B = $500 and A₀ = $470,α = 9%,r = 4%,σ = 17%,and δ = 0.If T = 8,what is the true default probability?

Question

Quizplus · Accepted Answer

The true default probability is given by the formula:PD = 1 - N((ln(B/A₀) - (r - δ)T) / (σ√T))Plugging in the given values, we get:PD = 1 - N((ln(500/470) - (0.04 - 0.00)8) / (0.17√8))PD = 1 - N(0.130)PD = 0.130Therefore, the true default probability is 13.0%.

Suppose That B = $500 and A₀ = $470,α =