Merton model

The Merton model, is a widely used "structural" credit risk model, which was developed by American economist Robert C. Merton in 1974.

Analysts and investors utilize the Merton model to estimate how capable a company is at meeting financial obligations, servicing its debt, and weighing the general possibility that it will go into credit default. The Merton model provides an intuitive way to estimate a firm's default risk by relating its debt and asset value, but its accuracy is limited by simplifying assumptions about how firms and financial markets behave and the Merton model is more accurate when combined with other analytical tools.

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