Exercise 16.1 In the Merton model, the firm value A(t) is not observed in the market. Hence, given the other parameters, the implied firm value AM is calculated from Equation (16.6) and the market price vcM

(0, T) of the corporate bond (cf. Exercise 4.11). Suppose T = 2, r = 0.02, F = 1, and σ = 0.2. If the market bond price is vcM

(0, T) = 90, calculate the implied firm value AM.

The value AM − F is often termed as the distance to default.