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Credit Spread
Can credit spread implicitly translate itself into default probability? does any equations provide a function of using credit spread to determine default probability? what factors drive the credit spread?
Credit Spread
You could certainly interpret them that way. In the simple example of zeros, you can earn r by investing in a risk-free zero and r+s by investing the in the risky. Then solve for the certainty equivalent cash flow at maturity when discounted by r. Extend this to general bonds...
Credit Spread
Part of the credit spread is due to the probability of default but there are also aother factors that come into play.Things like liquidity, taxes (especially in the US) and the risk premium affect the spread. Expected loss accounts for only a small part of the spread on corporate bonds.See for example:The Credit Spread PuzzleModelling European Credit SpreadsRegards,Niclas