Clarifying the below:
Given the prices of bonds that are not trading in distress as yet (so yields are meaningful), and data on the CDS spreads, I’ve been looking for some approaches for estimating a zero-recovery discount rate for the bond’s cash flows. The goal is to be able to estimate a sort of zero-recovery implied risky discount curve.
In other words, both the bond and CDS are pricing in some nonzero recovery rate, and the prices contain some probability of default that is not substantial enough to pull the bond price towards that recovery value. The question is whether I can find some “zero-recovery” cds curve that is consistent with the bond pricing in the market.
The idea is to use this “risky” discount curve to discount a related stream of cash flows. In other words, I’m looking to derive a credit curve that assumes 0 recovery rate. Any papers to recommend?