Estimation of Default Probability from Bond

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Asked 2 years, 11 months ago

Modified 2 years, 11 months ago

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Typically the formula to calculate the default probability from corporate Bond looks like

$\frac{S}{1-R}$

where $S$ is the spread of Corporate bond yield over the RFR and $R$ is recovery rate.

I failed to understand the intuition behind this formula. Why this formula refers to the default probability?

This might be very trivial, but I really appreciate for any insight on the reasoning.

asked Nov 1, 2020 at 18:50

Brian Smith

3611 silver badge8 bronze badges

$\begingroup$ This may help kamakuraco.com/Blog/tabid/231/EntryId/700/… $\endgroup$
– Dimitri Vulis
Nov 1, 2020 at 19:07
1

$\begingroup$ pls also see here: quant.stackexchange.com/questions/30231/… $\endgroup$
– Magic is in the chain
Nov 1, 2020 at 20:22

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