Bond Implied CDS Spread and CDS-Bond Basis

by Richard Zhou of the Depository Trust & Clearing Corporation

August 15, 2008

Abstract: 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.

JEL Classification: E43.

Keywords: Bond Implied CDS Spread, CDS Spread, Asset Swap Spread, CDS-Bond Basis.

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