The purpose of this investigation is to estimate credit spreads using the Merton model and Uncertainty Default Barrier model ($CreditGrade^TM$ model ) developed by Deutsche Bank, Goldman Sachs, JPMorgan and RiskMetrics Group. In designing the Uncertainty Default Barrier model, the authors have made assumptions so as to relate relevant model parameters to market observables. This investigation follows the methods used in $CreditGrade^TM$ model. The main purpose of this investigation is comparing credit spreads which are estimated by Merton model and Uncertainty Default Barrier model using data in both the Korean corporate bond market and the Korean Stock market and analyze properties of credit spreads in terms of other variables. Firstly, constant recovery rate is assumed and calculate theoretical bond price. Secondly, estimate the respective recovery rate using corporate bond trading data in 2001 year, and recalculate the corporate bond price based on above specific recovery rate. The result is the credit spreads using Merton model are lower than market credit spreads, whereas using Uncertainty Default Barrier model higher than market credit spreads. Especially, Merton model adopt well in high rating credit class, and Uncertain Default Barrier model using historical recovery rate can be used in lower credit class in Korea OTC corporate bond markets. According to Uncertainty Default Barrier model output, the corporate bond prices in Korea OTC market are overpriced. In order to match with theoretical price of Uncertainty Default Barrier model, higher credit spreads are needed in Korea OTC corporate bond markets.
