Default Probability Calculation Model Based on Credit Spread

The main contribution of the paper is it puts forward a model to calculate the default probability of corporation according to the credit spread of corporate bond. The term structure premium of T-1 years is measured by the difference between yields to maturity of T years and 1 year on the yield curve of corporate bonds with the same credit rating. The credit spread is measured by the yield to maturity of corporate bond of T years minus the term structure premium of T-1 years and the risk free interest rate. The default probability of corporation is calculated according to the credit spread and the loss given default of corporate bond. The empirical study shows that the default probabilities calculated with the model are consistent with the credit rating orders by the Moody's company, which verifies the rationality of the model.