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Explanation:
Credit spread = −[1/(T − t)] × ln(D/F) − R_f
Where:
(T − t) = remaining maturity
D = current value of debt
F = face value of debt
R_f = risk-free rate
Therefore,
Credit spread = −[1/6] × ln(110/200) − 0.05 = 0.04963
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Q.3060 Assume that the face value on a firm’s zero-coupon debt with six years remaining to maturity is equal to $200 million. Assume further that the current value of this debt is $110 million. What is the credit spread for this scenario if the risk-free rate (implied by the zero-coupon bond price) is 5%, assuming continuous compounding?
A
7.93%
B
5.64%
C
4.96%
D
4.36%