Amongst the important issues related to credit risk are the factors which affect yield spreads of corporate bonds. In recent literature, the yield spread is regarded as a measure of a comprehensive risk premium to compensate investors for a number of risks associated with corporate bonds. Using a first passage model in which the default occurs when corporate asset values hit a predefined default barrier, it is concluded that the credit spreads associated with Tunisian bonds are highly defined by default risks. It is to be noticed that residual spreads are sensible to the dynamics of default barrier, depending on the drift and volatility of a firm’s assets values. Moreover, this paper also explores the role of liquidity risks in the pricing of corporate bonds. This liquidity risk is a priced factor for the yield spread of risky corporate bonds and the associated liquidity risk premia helps to explain the credit spread puzzle. * Assistant Teacher, Faculty of Economic Sciences and Management of Nabuel, Université 7 Novembre à Carthage, URGMR, Tunisia. E-mail: chebbitarek78@yahoo.fr 1 This class includes, among others, the models of Nielson et al. (1993), Shimko et al. (1993), Leland (1994), Longstaff and Schwartz (1995), and Saâ-Requejo and Santa-Clara (1999). 2 For an extensive review of first passage models, see Bielecki and Rutkowski (2002).

In the literature, there are two theoretical approaches to the pricing of risky debt. Both approaches take into account, credit spreads as a central component in their pricing models and attempt to describe default processes. The credit spread is defined as the difference between the yield of corporate bond and the associated yield on Treasury bonds with the closest matching maturity.

In the structural approach,1 one makes explicit assumptions about the dynamics of a firm’s assets, its capital structure, as well as its debt and shareholders. It is then assumed that the firm defaults, if its assets are not sufficient to pay off the due debt. In this situation, corporate liabilities can be considered as contingent claims on the firm’s asset. The structural literature on credit risk starts with the paper by Merton (1974), which applies the option pricing theory developed by Black and Scholes (1973) to the modelling of a firm's debt. Notice that in this first category of models, defaults can only happen at the maturity of zero coupon debt.

Other recent studies depart from Merton (1974) to include, for example, stochastic interest rates (Longstaff and Schwartz, 1995; and Briys and de Varenne, 1997), stationary leverage ratios (Collin-Dufresne and Goldstein, 2001) and the information contained in stock market returns (Demchuk and Gibson, 2006). Also, Anderson and Sundaresan (1996) examine violations of the absolute priority rule and strategic default. Zhou (2001) introduces jumps in the asset value process. Although the second category of structural models leads to more realism in the pricing of defaultable bonds, it introduces serious drawbacks and analytical complexities.

Financial Risk Management Journal, Credit Risk, Corporate Bonds, Liquidity Risk, Corporate Liabilities, Treasury Bonds, Stock Market Returns, Macroeconomic Variables, Foreign Exchange Rates, Market Risk, Tunisian Bonds Market, Financial Bonds.