c)

In 200 words or less, describe the approach that the Merton model takes in producing credit

ratings. What is the most crucial parameter in the determination of corporate default

probability in the Merton model?

(10 Marks)

d)

In 200 words or less, describe how banks use the Receiver Operating Characteristic (ROC)

curves to gauge the credibility of potential borrowers.

(10 Marks)

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