Evaluating Structural Models in Credit Analysis

Medium Credit Analysis And Valuation Structural Models

ABC Corp. is a company known for its volatile earnings and has issued a callable bond. Analysts are evaluating the creditworthiness of ABC Corp. using a structural model approach to assess optimal capital structure and default probabilities. As part of their analysis, they consider the effects of asset volatility and leverage on the bond's credit spread.

Based on the information provided, which of the following statements regarding the structural models for credit analysis is true?

Structural models rely heavily on the assumption that equity holders will act to maximize their payoff, often leading to lower credit spreads.

In structural models, the firm's value must exceed the value of its liabilities at maturity for the bondholders to avoid a default.

Structural models utilize historical default rates to assess current default probabilities without regard to the firm's capital structure.

Hint

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