Structural model vs reduced form model

CFA Level II Fixed Income
#1

Does anyone have a plain-English dumbed-down few-sentence explanation for getting on top of these models?

#2

Structural model:

Assumptions:

  • Balance sheet is simple with only one class of zero coupon bond

  • Asset is actively traded on the market

  • Risk free rate is constant

Reduced form:

  • There is zero coupon liability traded on the market

  • Risk free is stochastic (random, not constant)

  • default risk depends on the economic conditions, which depend on non-constant variable => varies with business cycle

There are a lot of issues about this, but I feel like the assumptions are most likely tested :smiley: