A Zero Coupon Bond with a Maturity of One-Year Pays

Multiple Choice

A zero coupon bond with a maturity of one-year pays $1,000 if the issuing firm is not in default.If the firm is in default,the recovery rate is 35%.The risk-free interest rate for one year is 5% and the risk-neutral probability that the firm defaults is 20%.What is the credit spread (over the risk-free rate) on the bond? All yields are in simple terms with annual compounding.

A) 7.90%
B) 12.90%
C) 15.69%
D) 20.69%