Valuation Of Defaultable Security With Finite Maturity Based On The Incomplete Information

This paper considered the accounting noises, based on which the pricing formulaof the defaultable security with finite maturity was derived.Two models mainly used for credit risk pricing were introduced first. The struc-tural model was described by the Merton model and the first-passage-time model. Theterm structure of credit spreads was analyzed in the Merton model and the pricingformulas of defaultable securities were deduced in the first-passage-time model, in-cluding zero coupon bond, coupon bond and consol bond. For the reduced model,the intensity based and the compensator based reduced form model were elaborated.And it's discussed when the intensity was constant, determined function or randomvariable, respectively.The conditional default probability was computed based on the incomplete infor-mation model by using the optimal capital structure model. Then the pricing formulaof the defaultable security with finite maturity was derived. And the credit spreadswith short maturities did not equal to zero in this case.