Implementation of First Passage Time Method as a Warning System to Measure the Probability of Default in Bond

Within the rise of bond investors, an in-depth analysis of risk in bond investment will be continually needed. A lot of research mostly overviewed how a bond acts in the maturity date, while the First Passage Time is developed from the Merton Model, which helps to see credit risk from the issuing date to the maturity date. The First Passage Time Method lets us know when the model hits a certain point we call a Barrier value as the lower benchmark for the first time. It initiates a better understanding of a bond, as it does not only analyze a bond in its maturity date but also during the ongoing period. This method is applied in the Commonwealth Bank Bond I 2020, using company asset data from September 2020 to February 2023. According to R Programming output, if the barrier value is 75% of the total face value, the probability of default is 0.00003145407% with the market value of equity of IDR 21,991,492,000,000. This method will help us see a deeper view of the bond as we can set the Barrier and find whether our bond is “risky” enough, implying that investor losses will not exceed 5,06% of the initial investment within one week.