- CFA Exams
- CFA Exam: Level II 2021
- Study Session 13. Fixed Income (2)
- Reading 35. Credit Analysis Models
- Subject 3. Structural and reduced form credit models

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**CFA Practice Question**

According to the option analogy, the probability that the debt defaults at time T is equal to the probability that:

B. The asset's value falls below the face value of the debt at time T.

C. The asset's value becomes zero or less.

A. The asset's value falls below the present value of the debt at time t.

B. The asset's value falls below the face value of the debt at time T.

C. The asset's value becomes zero or less.

Correct Answer: B

Structural models are based on an option perspective of the positions of the stakeholders of the company. Bondholders are viewed as owning the assets of the company; shareholders have call options on those assets. The strike price is the face value of the debt.

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