PPT Slide

Numerical example

Data

Vt = 100, sV = 40%, ?t = quasi-debt-leverage ratio = 60%,

T - t = 1 year and r = ln(1 + 5%).

Calculations

1. Given

then F = 100 ? 0.6 ?(1 + 5%) = 63.

2. Discounted expected recovery value

3. Expected discounted shortfall amounts = 63 - 49.62 = 10.38.

4. Cost of default = value of the put

= 14.07% ? 10.38 = 1.46;

value of credit risky bond is given by 60 - 1.46 = 58.54.