Risk Structure Of Interest Rate Of Corporate Bonds With Credit Risk

One good measurement of credit risk is the yield to maturity of corporate bonds,which may re?ect the expected value of the possible risk of default or downgrade. Weusually take credit risk premium, subtracting risk-free rate from the yield to maturity,as the measurement. Considering default event as the main source of credit risk, we es-timate the credit risk premium of corporate bonds and do research on its risk structureof interest rate.We will first introduce the risk structure of interest rate of corporate bonds inMerton Model, and then redefine some concepts to derive formula for calculating thecredit risk premium in reduced-form models. In reduced-form models, the default isnot entirely dependent on the ?uctuations of the firm's assets value. So we introduceintensity process to model the default process. Making reasonable assumptions ofthe intensity process and residual process, we construct a series of European put op-tions through discrete approach to calculate the credit risk premium by Black-Scholesformula. Then we introduce ?uctuation equation of the firm's assets value and the"Quasi"-debt to firm value ratio respectively to simplify the formula. At last, we workout the risk structure of interest rate on corporate bonds through numerical method.