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Q.3196 Assume that a five-year zero-coupon bond, with a face value of $100 million, has a market value of $80 million. Two years have passed since the issuance of the bond. What is the risk-free rate if the bond is trading at a 2% credit spread? | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

The risk-free rate can be computed by working back the Credit Spread formula:

Credit spread = −[ $\frac{1}{(T - t)}$ × ln( $\frac{D}{F}$ ) ] − R $_f$

Where:
(T − t) = remaining maturity
D = current value of debt
F = face value of debt
R $_f$ = risk-free rate

Hence,

2% = −[ $\frac{1}{5 - 2}$ × ln( $\frac{80}{100}$ ) ] − R $_f`$ 2% = −[ −0.07438 ] − R$_f $2`% − 0.07438 = −R$ _f $R$ _f$ = 5.438%

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Q.3196 Assume that a five-year zero-coupon bond, with a face value of `$100` million, has a market value of `$80` million. Two years have passed since the issuance of the bond. What is the risk-free rate if the bond is trading at a 2% credit spread?

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