Assessing Credit Risk Using Quantitative Models

Alice is a senior portfolio manager at a fixed-income investment firm. She is currently analyzing the credit risk associated with a newly acquired portfolio of corporate bonds. The bonds are issued by companies in various industries, with differing credit ratings from rating agencies.

Alice understands that estimating the likelihood of a company defaulting on its bonds is essential in managing credit risk. She decides to use a quantitative approach to assess the credit risk. The following are common methods used in credit risk assessment:

1. Credit scoring models based on historical default rates.

2. Credit spread analysis relative to benchmark securities.

3. Economic value added (EVA) analysis on the issuer's financial performance.

Which method provides the most direct indication of a bond issuer's risk of default?