Expected Default Probability, Credit Spreads and Distance-from-Default

Journal of American Academy of Business, Vol. 7, No. 1, pp. 144-152, 2005

9 Pages Posted: 16 Dec 2005

See all articles by Heng-Chih Chou

Heng-Chih Chou

National Taiwan Ocean University

Abstract

This article analyzes the information content of the distance-from-default regarding a firm's default risk. Under the Merton's (1974) option pricing model, both the relation between the expected default probability of a firm and its distance-from-default, and the relation between the credit spreads and distance-from-default are examined. We demonstrate that both expected default probability and credit spreads could be expressed by the analytical function of the distance-from-default. This means that people can easily infer a firm's expected default probability and also its credit spreads from the information of the value of a firm's distance-from-default.

Keywords: distance-from-default, expected default probability, credit spreads, default risk modeling

JEL Classification: G13, G33

Suggested Citation

Chou, Heng-Chih, Expected Default Probability, Credit Spreads and Distance-from-Default . Journal of American Academy of Business, Vol. 7, No. 1, pp. 144-152, 2005, Available at SSRN: https://ssrn.com/abstract=870554

Heng-Chih Chou (Contact Author)

National Taiwan Ocean University ( email )

2 Bei-Ning Road
Keelung, Taiwan 20224
Taiwan

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