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Q.4355 A firm has a zero coupon bond maturing in 5 years. Assume that the face value of this debt is $100 million, with a current value of $88 million. Compute the credit spread assuming a risk-free rate of 1.5%. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

Credit Spread = $-\left(\frac{1}{\text{T-t}}\right) \ln\left(\frac{D}{F}\right) - r$

Where:
(T-t) = time remaining to maturity
D = current value of debt
F = face value of debt
R = risk free rate of interest

Credit Spread = $-\left(\frac{1}{5}\right) \times \ln\left(\frac{88}{100}\right) - 0.015 = 0.01057 = 1.057\%$

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Q.4355 A firm has a zero coupon bond maturing in 5 years. Assume that the face value of this debt is `$100` million, with a current value of `$88` million. Compute the credit spread assuming a risk-free rate of 1.5%.

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