In the analysis of a corporate bond's credit risk using structural models, the model often considers the relationship between a firm's asset value and its liabilities. Suppose we are evaluating a firm that has the following characteristics: Asset Value (V) = $500 million Debt Obligations (D) = $400 million Volatility of Asset Value (σ) = 20% Using a simple structural model, which of the following statements is most accurately related to the credit risk assessment of this firm's bond?

Exam

CFA Level 2

Section

Difficulty

Fixed Income

Credit Risk Assessment Using Structural Models

Medium Credit Analysis And Valuation Structural Models

In the analysis of a corporate bond's credit risk using structural models, the model often considers the relationship between a firm's asset value and its liabilities. Suppose we are evaluating a firm that has the following characteristics:

Asset Value (V) = $500 million
Debt Obligations (D) = $400 million
Volatility of Asset Value (σ) = 20%

Using a simple structural model, which of the following statements is most accurately related to the credit risk assessment of this firm's bond?

The probability of default increases as the asset value approaches the debt obligations.

Higher asset volatility leads to a lower probability of default.

The firm's credit spread decreases as the firm's asset value becomes more stable.

Hint

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