Generalizing Mertonʹs approach of pricing risky debt: some closed-form results

In this work, I generalize Mertonʹs approach of pricing risky debt to the case where the interest rate risk is modeled by the CIR term structure. Closed-form result for pricing the debt is given for the case where the firm value has non-zero correlation with the interest rate. This extends previous closed-form pricing formular of zero-correlation case to the generic one of non-zero correlation between the firm value and the interest rate.