Merton model of risky debt


Merton (1974) and Black and Scholes (1973) proposed a model to link the credit risk of a firm to its capital structure. The capital structure comprises a zero coupon bond, equity with no dividend payments, and the firm's asset value is assumed to follow a log normal diffusion process more ...


All numerical calculations are included in the Excel file. Click on the Excel Web App download button for a copy of the xlsx file.


Fig 1: Merton: with examples from Hull, Nelson and White (2004), and Saunders and Allan (2002).