Variations in Credit Spread Term Structures

Kian-Guan Lim, Yi Zhou, Yun Li
(Singapore Management University, 50 Stamford Road, Singapore 178899)

Abstract: This paper examines the slope and structure of credit spread curves across different ratings. We initially bootstrap a separate risky spot curve for each firm in the sample and then provide a parsimonious method to determine the shapes of the various credit spread curves. This procedure is more scientific and efficient than the visual observation employed traditionally. We find that credit spread curves of the various-graded bonds are much more variant and do not necessarily follow the few patterns prescribed by existing research. However, we can still see clearly that they are downward sloping when bonds are close to default.

Key words: corporate bond; credit risk; credit spread term structure

JEL codes: G10, G12, G24