  We give a comprehensive review of credit term structure modeling
methodologies. The conventional approach to modeling credit term structure is
summarized and shown to be equivalent to a particular type of the reduced form
credit risk model, the fractional recovery of market value approach. We argue
that the corporate practice and market observations do not support this
approach. The more appropriate assumption is the fractional recovery of par,
which explicitly violates the strippable cash flow valuation assumption that is
necessary for the conventional credit term structure definitions to hold. We
formulate the survival-based valuation methodology and give alternative
specifications for various credit term structures that are consistent with
market observations, and show how they can be empirically estimated from the
observable prices. We rederive the credit triangle relationship by considering
the replication of recovery swaps. We complete the exposition by presenting a
consistent measure of CDS-Bond basis and demonstrate its relation to a static
hedging strategy, which remains valid for non-par bonds and non-flat term
structures of interest rates and credit risk.
