978-1118999493 Chapter 6 Solution Manual

subject Type Homework Help
subject Pages 2
subject Words 450
subject Authors Barbara S. Petitt, Jerald E. Pinto, Wendy L. Pirie

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133
CHAPTER
6
CREDIT ANALYSIS MODELS
SOLUTIONS
1 . B is correct. Limitation B is incorrect. Credit ratings tend to be stable, not variable, across
e issuer-pays model for compensating credit rating agencies has a potential con ict
a European call option on the companys assets with a strike price equivalent to the face
value of the companys debt.
traded.  e structural model assumes that the company’s assets trade.
(or calibration).
business cycle.  e reduced form model requires a speci cation of the company’s balance
sheet. Both reduced form and structural models can be used to estimate the expected
present value of expected loss.
17.9983 18.00]
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134 Part II: Solutions
or 0.0408, or approximately 0.04. [4.3450 – 4.3042 = 0.0408 0.04]
bonds is di erent due to their future cash  ow structures. Both structural and reduced
form models can be used to analyze ABS and corporate bonds.

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