Answer: 0.94%.

## Explanation The credit valuation adjustment (CVA) represents the difference between the bond's value assuming no default and its current market price. **Initial CVA calculation:** - Bond value assuming no default: 105.45 - Current bond price: 103.15 - Initial CVA = 105.45 - 103.15 = 2.30 **New CVA:** 3.45 **Change in CVA:** 3.45 - 2.30 = 1.15 The change in CVA affects the bond price and consequently the credit spread. To find the change in credit spread, we need to calculate the new bond price and then the new YTM. **New bond price** = Bond value assuming no default - New CVA = 105.45 - 3.45 = 102.00 Now we need to calculate the new YTM using the bond price of 102.00: - Coupon: 5.5% - Maturity: 4 years - Price: 102.00 Using trial and error or financial calculator: - At 5.5% YTM: PV = 100 (par) - At 6.0% YTM: PV ≈ 98.85 - At 5.7% YTM: PV ≈ 99.95 - At 5.62% YTM: PV ≈ 102.00 Therefore, new YTM ≈ 5.62% **New credit spread** = New YTM - Default-free YTM = 5.62% - 4.00% = 1.62% **Change in credit spread** = New credit spread - Current credit spread = 1.62% - 0.62% = 1.00% Among the options, 0.94% is closest to 1.00%.

Author: LeetQuiz Editorial Team