Credit Analysis of TechForward Corp. Bond

Very Hard Credit Analysis And Valuation Structural Models

Sheldon Investments is currently analyzing a corporate bond issued by TechForward Corp. The bond has a face value of $1,000, a coupon rate of 7%, and matures in 10 years. TechForward operates in a technology sector characterized by rapid innovation but also by significant volatility. The company has shown consistent cash flows, but its capital structure comprises 60% debt and 40% equity. To evaluate the credit risk of this bond, Sheldon decides to employ a structural model of credit risk.

A structural model assumes that a company's assets follow a stochastic process and that default occurs when the value of the company's assets falls below a certain threshold. The market value of TechForward’s assets is estimated at $900 million, and the book value of its liabilities is $600 million. What can be inferred about the probability of default based on the given information?

The probability of default is low because the company's asset value exceeds the book value of liabilities.

The probability of default is high due to the significant amount of debt relative to equity.

The probability of default cannot be determined without knowing the volatility of the asset value.

Hint

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