Abstract
This paper develops a modified closed-form formula for option prices under the multifactor stochastic volatility model by means of the Fourier transform method. We apply this result to evaluate credit spreads in the context of the structural-form modeling. Through numerical simulation, we observe that some model parameters are sensitive to the deformation of credit yields. This capability to generate various shapes of the credit spread term structure enables a further study of model calibration to corporate bond yields. With different investment grades, empirical results reveal that the two-factor Heston model is indeed superior to other models including the Black-Scholes model and the one-factor Heston model.