Evaluating Corporate Bonds using Structural Models

Hard Credit Analysis And Valuation Structural Models

As an analyst at a fixed income investment firm, you are evaluating a corporate bond using a structural model. This model incorporates various risk factors including the firm's assets, liabilities, and the likelihood of default. In particular, you are focused on determining how sensitive the bond's value is to changes in the firm's asset value.

Given this context, consider the following statements regarding a structural model’s ability to value bonds:

Structural models primarily assess credit risk through historical default rates and loss given default.

Structural models derive the bond's value by modeling the firm's asset dynamics and the implications for default risk.

The primary output of a structural model is to estimate recovery rates based solely on maturity.

Hint

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