Abstract
Popular approaches to default probability estimation are often based on the approach initially described in Merton [1974]. By explicitly modeling a firm9s market value, market value volatility and liability structure over time using contingent claims analysis the Merton model defines a firm as defaulted when the firm9s value falls below its debt. This article demonstrates how a simplified “spread sheet” version of the Merton model produces distance to default measures similar to the original Merton model. Moreover, when applied to a sample of US firms, the simplified model gives a relative ranking of firms that is essentially unchanged compared to the Merton model.
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