Merton Distance-to-Default

Credit Risk

Structural (Merton/KMV-style) model: solves for asset value and volatility implied by equity, and the market-implied probability of default.

Solves the Merton structural model iteratively: equity is treated as a call option on the firm's assets, so today's equity value and volatility imply an asset value, asset volatility, and — from those — a distance to default and market-implied default probability. This is a standard simplified point-in-time solve, not a full historical time-series KMV calibration.

Market value of equity

Market cap, or negotiated equity valueEquity volatility %

AnnualizedFace value of debt

Total liabilities due at horizonRisk-free rate %

Horizon (years)

Implied asset value

1,36,50,546.43

Implied asset volatility

23.44%

Distance to default

3.65

Implied 1-period PD

0.013%