Question #25
Reading: Reading 28 Credit Analysis Models
PDF File: Reading 28 Credit Analysis Models.pdf
Page: 11
Status: Correct
Correct Answer: B
Question
When assessing a company's credit risk using structural models, which of the following statements is most accurate?
Answer Choices:
A. Owning debt is economically equivalent to owning a European call option on the company’s assets
B. Structural models do not account for the impact of interest rate risk of the value of a company’s assets
C. Owning equity is economically equivalent to owning a risk free bond and simultaneously selling a put option on the assets of the company
Explanation
Owning equity is economically equivalent to owning a European call option on the assets
of the company. Owning debt is economically equivalent to owning a risk free bond and
simultaneously selling a put option on the assets of the company. The structural model
assumes that risk-free rate is not stochastic (i.e., it assumes that risk-free rate is constant).