Explanation:
The correct answer is A.
credit spread =
where:
= remaining maturity
= current value of debt
= face value of debt
= risk-free rate
Thus,
credit spread =
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Q.1805 Assume that the face value on a firm’s zero-coupon debt with five years remaining to maturity is equal to $100 million. Also assume that the current value of this debt is $88 million. Compute the credit spread for this scenario if the risk-free rate (implied by the zero-coupon bond price) is 1%.
A
1.56%
B
1.20%
C
1.45%
D
2.00%