Credit Value-At-Risk, Credit Spread, and Distance-To-Default

The distance-to-default proposed by Moody's KMV can measure how far a firm's asset value away from its debt obligations. This article analyzes the information content of the distance-to-default regarding a firm's credit risk. Under the Merton's (1974) structural model, this article examines the relationship between a firm's distance-to-default with other credit risk metrics such as expected default probability, credit spread, and credit value-at-risk. I demonstrate that the expected default probability, the credit spread, and also the value of credit value-at-risk could be expressed by the analytical functions of the distance-to-default. This result implies that the value of a firm's distance-to-default contains much information regarding its credit risk.