1. Suppose that the financial ratios of a potential borrowing firm took the foll

Question

1. Suppose that the financial ratios of a potential borrowing firm took the following values x, = 0.30 X30.30 Xs=0.15 X5 2.1 Altman's discriminant function takes the form Z-1.2X1+ 1.4X2 3.3 X3 0.6 X4 1.0X5 The Z score for the firm would be a) 1.64 b) 1.56 c) 2.1 d) 3.54 e) 2.96 2. The following represents two yield curves MaturityPure Discount B-rated Corporate Bond Yields l year 2 year 20 year Treasury Yields 3 percent 6 percent (Pure Discount Bonds) 6 percent 10 percent ercent ercent What is the implied probability of repayment on one-year B - rated debt? a) 95.00 percent b) 97.17 percent C) 94.00 percent d) 97.00 percent e) 97.09 percent

Explanation / Answer

Part 1: We will input the value of respective variables in Z equation as below:

Z = 1.2 (0.30) + 1.4 (0) + 3.3 (-0.30) + 0.6 (0.15) + 1 (2.1) = 1.56; hence option (b)

Part 2. The im plied probability of repayment will be = (1+rtreasury) / (1+rBrated corporate) = (1+3%)/(1+6%) = 97.17%.

Hence option (b)

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