Which financial metric provides insights into potential credit risk by measuring the distance from assets to liabilities?

Distance to Default (DD) is a financial metric that quantifies the likelihood of a company's default on its liabilities, essentially assessing credit risk by indicating how far a firm's asset value is from its default point, which is typically its liabilities. It is computed using the company's current asset value, its volatility, and the face value of its debt.

A higher Distance to Default suggests that a firm has a greater cushion of asset value over its liabilities, reducing the risk of default. Consequently, financial analysts and risk managers utilize this metric to gauge credit health and stability.

In contrast, other options do not specifically measure the distance from assets to liabilities in the same manner. Value at Risk (VaR) assesses potential losses in the value of an asset or portfolio over a specified time period for a given confidence interval but does not directly measure credit risk through assets and liabilities. The Loan-to-Value Ratio (LTV) is typically used in real estate lending to evaluate the risk of a loan relative to the value of the underlying property rather than providing a comprehensive insight into credit risk based on overall asset and liability dynamics. The Asset Coverage Ratio, while indicating a company's ability to cover its debts with its assets, does not precisely define the risk of default as Distance