In this post, we will see how to price a risky bond with a reduced-form model for default risk. We assume in this first part that there is no recovery rate in case of default. I. Pricing of a Risky Zero-Coupon Bond with Zero Recovery Rate in Case of Default Pricing of a Risk-Free Zero-Coupon […]
There are two main families of default models. Structural models, such as the Merton model based on the firm’s assets and liabilities and reduced-form models focusing directly on the timing of default. We will give here an introduction to reduced-form credit risk models. Default Time Modelling In reduced-form or intensity-based models, the default time 𝛕 […]
We will focus here on the default time distribution. We will see the relationship between the cumulative and the marginal default rates and how these two probabilities change with time depending on the credit quality of the borrower. Default Event and Default Time A default event refers to a situation where a borrower fails to […]
We will focus here on the probability of default, one of the key measure of credit risk, introducing different ways to measure it. What is the Probability of Default? The probability of default is the likelihood that a borrower, which can be an individual, a corporate or a government fails to meet its debt obligations […]
We will give an introduction to credit risk, presenting the main types of credit risk, the key components and measures of credit risk, discussing the different factors influencing it and ways to manage it. Credit Risk: What is it? Credit risk refers to the potential that a borrower or counterparty will fail to meet its […]
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