Merton Model

AAA

DEFINITION of 'Merton Model'

A model, named after the financial scholar Robert C. Merton, that was developed in the 1970s and is used today to evaluate the credit risk of a corporation's debt. Brokerage firm analysts and some investors employ the model in order to determine a company's ability to service its debt, meet its financial obligations and to gauge the overall possibility of credit default.

Also referred to as "Asset Value Model."

BREAKING DOWN 'Merton Model'

Fischer Black and Myron Scholes utilized Merton's work to build out what has since become known as the Black-Scholes pricing model.

Securities analysts and loan officers attempting to determine a company's credit fault risk will utilize the Merton Model as a means of analysis. The model allows the analysts to better value the company, as well as determine its ability to remain solvent through the analysis of reported debt amounts and maturity dates.

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Default Risk

    The event in which companies or individuals will be unable to ...
  3. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  4. Black's Model

    A variation of the popular Black-Scholes options pricing model ...
  5. Black Scholes Model

    A model of price variation over time of financial instruments ...
  6. Default Model

    A type of model used by financial institutions to determine the ...
Related Articles
  1. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  2. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Mutual Funds & ETFs

    Evaluating Bond Funds: Keeping It Simple

    Discover some of the key factors for determining a fund's risk-return profile.
  4. Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  5. Retirement

    Risk And Diversification

    Safeguarding your portfolio involves a few simple steps.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  7. Fundamental Analysis

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  8. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  10. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
RELATED FAQS
  1. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  2. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  6. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!