This article provides a Markov model for the term structure of credit
risk; spreads. Tbe model is based on Jarrow and Turnbull (1995), with
the bankruptcy process following a discrete state space Markov chain i
n credit ratings. The parameters of this process are easily estimated
using observable data. This model is useful for pricing and hedging co
rporate debt with imbedded options, for pricing and hedging OTC deriva
tives with counterparty risk for pricing and hedging (foreign) governm
ent bonds subject to default risk (e.g., municipal bonds), for pricing
and hedging credit derivatives, and for risk management.