# Black-Scholes Model question

Suppose a company has a zero coupon bond with face value of 200 million which matures in a year. Its assets has a market value of 300 million. The standard deviation is 30% and the risk free rate is 5%. It does not pay any dividends. Based on the Black-Scholes model, what is the value of debt and equity? How can we replicate this option?

I'm new to finance, but don't we need to know whether this is a call or a put option to replicate it? Also how do we go about solving for the value of debt and equity using the B-S model? Wouldn't the value of debt just 200M/(1+5%)? What does it have to do with the model?

The valuation debt $$=\frac{200}{1.05}$$ assumes no default. We model default by the probability of the value of the assets dropping below 200 (redemption value of debt) after one year.