A firm with assets value at $500,000 issues a 6 year zero-coupon bond with a par value of $550,000. Using a put option approach, what is the value of the defaultable bond given r =
)07, volatility is given as .33 and there is no dividend paid by the company?
A) $75,970
B) $245,601
C) $285,406
D) $361,376

Question

Quizplus · Accepted Answer

The value of the defaultable bond can be calculated using the put option approach, which involves using the Black-Scholes option pricing model to value the put option. Given the parameters, the correct calculation results in a bond value of $285,406.

A Firm with Assets Value at $500,000 Issues a 6