Credit Risk
Corporate bonds are subject to potential default.
Therefore, the promised yield is the maximum possible
yield to maturity of the bond, not necessarily the actual
yield to maturity.
To compensate investors for the possibility of
bankruptcy, a corporate bond must offer a default
premium, a differential between the promised yield and
the expected yield to maturity.
The default premium depends on :
o the probability of default
o the likely loss in the event of default.