Answer: 2.19%

The average credit spread of the company's bonds is calculated by taking the difference between the yield of the debt (RD) and the risk-free rate (Rf). The formula provided in the file content is: \[ \text{Credit spread} = RD - Rf = -\left(\frac{1}{T}\right) \ln\left(\frac{D}{F}\right) - Rf \] Where: - \( D \) is the market value of the debt (CAD 100 million). - \( F \) is the face value of the debt (CAD 115 million). - \( T \) is the time to maturity (2 years). - \( Rf \) is the risk-free rate, which is the yield on Canada government bonds with a 2-year maturity, given as 4.8% per year. Plugging in the values: \[ \text{Credit spread} = -\left(\frac{1}{2}\right) \ln\left(\frac{100}{115}\right) - 0.048 \] Calculating the natural logarithm and then the credit spread: \[ \text{Credit spread} = -\left(\frac{1}{2}\right) \ln(0.86956) - 0.048 \approx 0.0219 \text{ or } 2.19\% \] This calculation shows that the average credit spread is 2.19%, which corresponds to option C. This spread represents the additional yield that investors demand to compensate for the higher risk associated with the company's bonds compared to the risk-free government bonds. The other options provided (A, B, and D) are incorrect due to various reasons such as using the wrong yield calculation or not applying continuous compounding correctly.

Author: LeetQuiz Editorial Team