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