medium · Private Credit documentation-covenants-terms

In credit theory, what is the primary distinction between the Black-Cox model and the Merton model?

1. Merton assumes that asset values are normally distributed
2. Black-Cox allows for default before maturity via a barrier trigger
3. Black-Cox is used only for pricing unsecured subordinated debt tranches
4. Merton explicitly accounts for stochastic movements in interest rates over time

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