Role of Default Barrier in Structural Models

Very Easy Credit Analysis And Valuation Structural Models

In the context of credit analysis and valuation, structural models are often used to assess the risk of default associated with a company or a financial asset. These models leverage the company's capital structure and the relationship between the value of its assets and liabilities. A fundamental element of structural models is the concept of a 'default barrier'.

Which of the following statements best describes the role of the default barrier in structural models?

The default barrier is the minimum threshold of asset value below which default occurs.

The default barrier is the maximum amount of debt that a company can incur without defaulting.

The default barrier is the interest rate at which the cost of debt becomes unmanageable.

Hint

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