What's Different about Loans? An Analysis of the Risk Structure of Credit Spreads
35 Pages Posted: 10 Sep 2008
Date Written: January 7, 2007
While extensive research on the relationship between credit risk and spreads has been produced for bonds and loans separately, few studies have analyzed them jointly. We derive a simple structural model where a stochastic default barrier accounts for informational noise, and differences between bond and loan spreads are explained through the different screening ability of bankers and bond-holders. We then test the model on a sample of 7,926 Eurobonds and 5,469 syndicated loans. Empirical results confirm the key finding of the model: while spreads increase as ratings worsen for both bonds and loans, the former show a steeper spread/rating relationship.
Keywords: Eurobonds, syndicated loans, credit ratings, spreads, default risk
JEL Classification: G15, G21, G28
Suggested Citation: Suggested Citation