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When we calculate the implied default probabilities from CDS, can we use that information to price bonds?

I am getting familiar with Fixed Income. I saw textbooks using implied default probabilities in CVA and credit derivatives context, but I wonder if it can be used to adjust the price of bonds (for that issuer).

Any paper/textbook/etc would be highly appreciated.

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Yes you can use implied default intensities to price Bonds if you have a quoted CDS for the issuer of the Bond or for an issuer with roughly the same characteristics even tough that's not the best thing to do. You can also avoid the whole CDS dilema with a repo on the security itself, and in this case counterparty risk is fully taken by the repoer...

@Edit: Here is a good paper "https://studenttheses.cbs.dk/bitstream/handle/10417/3636/marko_celic.pdf?sequence=1" you can check page 37... And for the replication of CDS with a repo here's what I found after a quick search even though it's not explicitly done for the purpose of Bond pricing in this paper https://arxiv.org/pdf/1305.0040.pdf

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  • $\begingroup$ Can you please share the methodology or any reference on this please? thx $\endgroup$ – Newbie Jun 5 at 15:03
  • $\begingroup$ @Newbie check the edit :) $\endgroup$ – Xman Jun 5 at 15:15
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You can look for credit triangle. It establishes a relation between hazard rate, spread and recovery rate.

Look at this: How to compute the implied probability of default from a CDS spread?

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