Structural Credit Risk Modelling and Valuation Based on the Merton Model
Abstract
The main aim of this research is to model and analyze the probability of default of corporate
entities on their bonds using the Merton Model and subsequently evaluate each of
the entity’s credit spread. Financial companies have a risk of becoming insolvent due to
poor credit risk assessment and management. Bankruptcy is a major issue in the nancial
sector as it leads to a decrease in economic growth rate. The structural credit risk model
used has been e ective in the determination of the probability of default. The Merton
Model uses a company’s capital structure and its asset volatility to analyze the default
probability at a given maturity time. The data analysis shows that default probabilities
are directly proportional to the company’s liabilities, whereas the credit spread is directly
proportional to the risk of default but inversely proportional to the credit quality of that
particular company. This research is a comprehensive guide to the assessment, analysis
and management of credit risk.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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