PPT Slide
Empirical observations on credit spreads
• Default premiums are shown to be inversely related to firm size from
empirical studies (not reflected in Merton’s model).
• When maturity is approached, the credit spread either tends to zero
(for medium- to low-leveraged firms) or tends to infinity (for high-
• Observed credit spreads are systematically higher than the model
credit spreads (under realistic firm value volatilities).