Bond Implied CDS Spread and CDS-Bond Basis
12 Pages Posted: 9 Sep 2008 Last revised: 14 Jun 2016
Date Written: September 9, 2008
We derive a simple formula for calculating the CDS spread implied by the bond market price. Using no-arbitrage argument, the formula expresses the bond implied CDS spread as the sum of bond price, bond coupon and Libor zero curve weighted by risky annuities. We show that the bond implied CDS spread is consistent with the standard CDS pricing model if the survival probabilities and recovery are consistent with the bond price.
Keywords: CDS Spread, Bond Implied CDS Spread, CDS-Bond Basis
JEL Classification: E43
Suggested Citation: Suggested Citation