8. (12%; 2% for each subquestion) A firm has non-dividend-paying equity (Ex: equity value at time t) and zero- coupon debt (B1: debt value at time t; promised payment at time T is 800). The other parameters are: A is the asset value of the firm at time t., fe=4% (continuous time), T-2 years. (a) If the initial asset value Ao = 1,000 and asset volatility = 25%, find the current market value of risky debt. (b) In part (a), find the continuously compounded bond yield (%) and credit spread (%). (c) In part (a), if asset volatility = 35%, find the continuously compounded bond yield (%) and credit spread (d) The distance to default (DD) is defined as In T B 2 DD, where u is the expected continuously compounded return on A and ox=25%. If u=5%, find the value of DDo. (e) In part (d), find the implied probability of default (or the expected default frequency), which is calculated as N(-DD.). (1) In part (a), find the volatility of equity in this model, which is calculated as op = elasticity* = (Ao/Es)(@E/2A)*= (A/E.N(di)*OA. We use t, when calculating di