Predictions of Default Probabilities in Structural Models of Debt
by Hayne E. Leland of the University of California, Berkeley
April 22, 2004
Introduction: This paper examines the default probabilities (DPs) that are generated by alternative "structural" models of risky corporate bonds.1 We have three objectives:
Our analysis is limited to structural models of debt and default. These models assume that the value of the firm's activities ( "asset value") moves randomly through time with a given expected return and volatility. Bonds have a senior claim on the firm's cash flow and assets. Default occurs when the firm fails to make the promised debt service payments.
Keywords: Default frequencies, structural models, credit risk.
Published in: Journal of Investment Management, Vol. 2, No. 2, (Q2 2004), pp. 5-20.
Previously titled: Predictions of Expected Default Frequencies in Structural Models of Debt
This paper is republished as Ch.2 in...