Estimating One-Year Probability of Default for Corporate Bonds

Hard Credit Analysis And Valuation Credit Risk Measurement

Consider a corporate bond with a credit rating of BB. The issuer operates in a cyclical industry and has experienced a decline in earnings due to recent economic downturns. As part of your credit analysis, you decide to measure the credit risk associated with this bond. One important measure you are considering is the probability of default (PD) over the next year, which is influenced by both the issuer's financial condition and market conditions.

Which of the following options provides the most appropriate method to estimate the one-year probability of default for the issuer of this bond?

Using historical default rates for bonds with similar credit ratings and industry sectors.

Calculating the bond's yield spread over risk-free securities and converting that spread to a probability of default using a structural model.

Analyzing the issuer’s debt service coverage ratio and cash flow projections to estimate the likelihood of default.

Hint

Submitted2.9K

Correct1.9K

% Correct67%