The purpose of this investigation is to estimate credit spreads using Merton model and compare credit spreads which are estimated by Nelson-Siegel approach using data in both the Korean corporate bond market and the Korean Treasury bond market and analyze properties of credit spreads in terms of other variables
Even though the method based on Merton model is used, slightly different methods from Merton' s original are tried. First, Nelson-Siegel approach is used to reflect the term structure of both risk free bond zero-coupon yield and risky bond zero-coupon yield. Second, total 9 ends of reporting periods are selected to measure exact debt structure of firms. Last, coupon is considered in terms of both debt amount and maturity.
The result is the credit spreads using Merton model are lower than the ones estimated by Nelson-Siegel approach. Explicit trends between credit rating and credit spreads using Merton model are not found without coupon effect but Merton model more underestimated the credit spreads for the firms that have lower credit ratings with coupon effect.
