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This paper develops a two-dimensional structural framework for valuing creditdefault swaps and corporate bonds in the presence of default contagion.Modelling the values of related firms as correlated geometric Brownian motionswith exponential default barriers, analytical formulae are obtained for bothcredit default swap spreads and corporate bond yields. The credit dependencestructure is influenced by both a longer-term correlation structure as well asby the possibility of default contagion. In this way, the model is able togenerate a diverse range of shapes for the term structure of credit spreadsusing realistic values for input parameters.

Modelling Bonds & Credit Default Swaps using a Structural Model with Contagion