Explain the structural and the reduced-form approaches to modelling corporate credit risk, covering what each assumes and its strong and weak points

Structural models treat equity as a call option on the company's assets with a strike equal to the face value of debt, so risky debt is worth D = risk-free debt − a put on the assets. Default happens when assets fall below the debt at maturity. They explain why default occurs and link credit to leverage and asset volatility, but they need asset values and volatility that cannot be observed and assume a simple liability structure. Reduced-form models treat default as a random event arriving with a hazard rate that can depend on company and macro variables. They use observable data and fit market prices, but do not explain why a company defaults.