Bond prices, default probabilities and risk premiums

John Hull, Mirela Predescu and Alan White

Journal of Credit Risk

Abstract: ABSTRACT A feature of credit markets is the large difference between probabilities of default calculated from historical data and probabilities of default implied from bond prices (or from credit default swaps). Consider, for example, a seven-year A-rated bond. As we will see, the average probability of default backed out from the bond’s price is almost ten times as great as that calculated from historical data.

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