Question #24 - Reading 28 Credit Analysis Models

Reading: Reading 28 Credit Analysis Models

PDF File: Reading 28 Credit Analysis Models.pdf

Page: 10

Status: Incorrect

Correct Answer: A

Your Answer: C

- Which of the assumptions stated by Scowen regarding the reduced form model is most accurate? A) Assumption 3. B) Assumption 1. C) Assumption 2.

Scowen's comment regarding option pricing theory and structural models is best described as:

A. accurate

B. inaccurate, as structural models value risky debt by deducting the value of a call option on the company’s assets from the value of risk free debt

C. inaccurate, as structural models value risky debt by adding the value of a put option on the company’s assets to the value of risk-free debt

Scowen's statement is correct. Under structural models: value of risky debt = value of risk-free debt – value of put option on company assets

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