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 :
othe probability of default
othe likely loss in the event of default.