The purpose of this study is to analyze propriety of Credit Spreads in corporate loan of a commercial bank using the empirical data of that bank. Credit Spreads in bank loan should cover the expected credit loss from bankruptcy of the company. So the exact measurement and pricing of credit risk is essential in bank loan policy.
In this paper, I used two methods for credit risk pricing. The one is Structural Approach which is represented by Merton’s Model and the other is Reduced-form Approach which is represented by ‘JLT Model’ of Jarrow, Lando and Turnbull.
The Credit Spreads of 1 year maturity corporate loans for investment grade of ‘A Bank’ don’t have big differences from theoretical ones. However the Credit Spreads of loans whose maturity is longer than 1 year show big differences from theoretical ones. The results are same in both approaches- Structural and Reduced-form approach. I can conclude from the empirical study that ‘A Bank’ should increase the Credit Spreads for corporate loans whose maturity is longer than 1 year.