Subordinated Debt value using riskless rate and Put option

[rajvar67]

Hi, how to derive subordinated debt value if we were to deduct Put option price from the Present value of Sub Debt?
similar to how we calculate Senior Debt value, where, Senior Debt = PV senior Debt using Riskless rate - Put option on Assets (where Strike = Value of firm)
In case of Subordinated Debt = PV of Sub debt using Riskless rate - Put option on ? (what is the Strike that we need to use here if we're using this approach?)

I found this where it's mentioned the formula as below, is that correct?

https://forum.bionicturtle.com/thre...t-stulz-applying-merton-model.7677/post-29339

value of senior debt
D= F exp (-rT) - p (V, F, T, r)


value of subordinated debt
D*= (F+U) exp (-rT) - p (V, F+U, T, r)

 

[gsarm1987]

Hi, how to derive subordinated debt value if we were to deduct Put option price from the Present value of Sub Debt?
similar to how we calculate Senior Debt value, where, Senior Debt = PV senior Debt using Riskless rate - Put option on Assets (where Strike = Value of firm)
In case of Subordinated Debt = PV of Sub debt using Riskless rate - Put option on ? (what is the Strike that we need to use here if we're using this approach?)

I found this where it's mentioned the formula as below, is that correct?

https://forum.bionicturtle.com/thre...t-stulz-applying-merton-model.7677/post-29339

value of senior debt
D= F exp (-rT) - p (V, F, T, r)


value of subordinated debt
D*= (F+U) exp (-rT) - p (V, F+U, T, r)

Lets simplify: equity means call option on value of Assets. if you subtract the call from asset that implies you did Asset - Equity that leaves you with debt. now which type of debt comes first. senior debt. for senior debt value you need to deduct from firm value, two things.. call on assets (equity) and the subordinate debt.

Now how do we find subordinate debt? Subordinate Debt (V,U,T,t) = c(V,F,T,t) -c(V,F + U, T,t). alot of moving parts. but let me know if it helps. Also, there is spreadsheet, i dont know if you have access to that?