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| Author: | Kealhofer, S. |
| Title: | Quantifying Credit Risk II: Debt Valuation |
| Journal: | Financial Analysts' Journal
2003 : MAY-JUN, VOL. 59:3, p. 78-92 |
| Index terms: | DEBT INVESTMENTS CREDIT PORTFOLIO MANAGEMENT STRATEGY |
| Language: | eng |
| Abstract: | This article is the second in a two-part series on quantifying credit risk. Part II explores the connection between default prediction and valuation. First, it shows that the levels of predicted individual and aggregate probabilities of default from the KMV model display considerable variation through time and that these predictions correspond to the actual, subsequently realized levels of default. Second, contrary to past understanding, most of the variation in the spreads on corporate bonds can be attributed to variation in expected default probability, not to the risk premium on corporate bonds, which is relatively stable through time. Third, Part II shows that the term structure of bond spreads corresponds empirically to the term structure of default risk. |
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