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Q.3061 A $2 million corporate bond has a remaining maturity of 7 years. Using the Merton model, the current value of the bond is calculated as $1.2 million. Assuming that the risk-free rate is 5%, credit spread for this bond is closest to: | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

We know that

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

Therefore,

\text{Credit spread} = -\left[\frac{1}{7}\right] \times \ln\frac{1.2}{2} - 0.05 = 0.0229 \text{ or } 2.29\%

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Q.3061 A `$2` million corporate bond has a remaining maturity of 7 years. Using the Merton model, the current value of the bond is calculated as `$1.2` million. Assuming that the risk-free rate is 5%, credit spread for this bond is closest to:

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