Merton Structural Credit Model

Credit Ch. 21 — Distance-to-Default

Asset Value ($M)

Debt Face ($M)

Maturity (yrs)

Risk-Free Rate (%)

Asset Volatility (%)

Vol Min (%)

Vol Max (%)

Vol Steps

DD > 4.0 → AAA/AA DD 3.0–4.0 → A DD 2.0–3.0 → BBB DD 1.5–2.0 → BB DD 1.0–1.5 → B DD < 1.0 → CCC/D

Equity Value—

Debt Value—

Distance-to-Default—

Default Probability—

Credit Spread (bps)—

d₁—

d₂—

Leverage (D/V)—

Implied Rating—

E = V·N(d₁) − D·e^{-rT}·N(d₂)
DD = d₂ ; PD = N(−d₂)

Ch. 21 — Merton Structural Model Ch. 21 — Distance-to-Default Ch. 21 — Credit Spread Derivation