Moody's KMV model and its apply in credit risk evaluation of corporate

Moody's KMV Model, designed to help clients enhance the economics returns of their business, investors and corporations, is the world's leading provider of quantitative credit tools to lenders. With the issue of International Convergence of Capital Measurement and Capital Standards: a Revised Framework in June 2004, lending institutions are becoming aware of the importance of risk measurement and begin to adopt efficient credit policy to descend credit risk. The paper reviews the evolvement of Moody's KMV research. Based on the rich data set about public and private default events, Moody developed credit risk models. Furthermore. the link between loan and option is presented. The general framework of KMV credit risk model is given and particularly, three steps of determining expected default frequency are introduced. Finally, an empirical test proves that KMV is more accurate than S&P rating.