- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 35. Credit Analysis Models
- Subject 3. Structural and reduced form credit models
CFA Practice Question
The historical estimation method cannot be used to estimate the inputs to the structure model. This is mainly because:
A. The company's asset value is not observable.
B. It requires the company's equity be actively traded so that a time series of market prices for the company's equity is available.
C. The method implicitly assumes a constant interest rate. This is not realistic.
Explanation: The method requires the company's assets, which include buildings and non-traded investments, to trade in frictionless markets.
Structural models are currently used in practice by commercial banks and credit rating agencies.
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