PPT Slide
• A firm with risky assets V, which are financed by equity S and
one debt obligation maturing at time T with face value (par value) F.
• The firm’s liabilities are viewed as contingent claims issued against
• Default occurs at debt maturity T whenever the firm’s asset value
falls short of debt value.
Merton, R.C., “On the pricing of corporate debt: The risk structure
of interest rates,” Journal of Finance vol. 29 (1974) p.449-470.