Understanding Reduced Form Models in Credit Analysis

In a credit analysis framework, reduced form models are often employed to assess the likelihood of default and to value credit derivatives. These models assume that the default event follows a stochastic process driven by a set of observable and unobservable risk factors. In this context, consider a corporate bond issued by Company X, which has a current credit rating of BB. The bond's yield spreads over the risk-free rate can be indicative of the market's perception of credit risk and the probabilities of default over time.

Using a reduced form model, analysts generally utilize the following key parameters: hazard rates, recovery rates, and the term structure of interest rates. Based on this information, which of the following statements about reduced form models and their application in credit analysis is most accurate?