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After completing this reading you should be able to:
- Compare the different ways of representing credit spreads.
- Compute one credit spread given others when possible.
- Define and compute the Spread ‘01.
- Explain how default risk for a single company can be modeled as a Bernoulli trial.
- Explain the relationship between exponential and Poisson distributions.
- Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
- Calculate the unconditional default probability and the conditional default probability given the hazard rate.
- Distinguish between cumulative and marginal default probabilities.
- Calculate risk-neutral default rates from spreads.
- Describe advantages of using the CDS market to estimate hazard rates.
- Explain how a CDS spread can be used to derive a hazard rate curve.
- Explain how the default distribution is affected by the sloping of the spread curve.
- Define spread risk and its measurement using the mark-to-market and spread volatility.

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