Equity-based credit models
Equity based models are discussed for public listed companies Equity can be seen as options with strike at the debt face value and the firm's value as the underlying Probability of default can be obtained from the correct interpretation of the option mentioned above. Photo by The New York Public Library on Unsplash Hello all - hope you are all fine and safe. In this post, I would like to briefly discuss some very interesting models for the quantification of credit score using the equity value of public listed companies. Equity-based models Suppose an on-going company needs additional resources to fund determined endeavor. In principle, such additional resources can be funded basically either issuing new debts in the form of bonds, FRNs, and other liability instruments, or selling fractions of ownership. Here we considered the case of companies whose stocks are negotiated in an stock exchange. Moreover, equity-based models assumes efficient market hypothesis (EMH).
