Suppose We Have a Zero-Coupon Bond That Pays $1 After

Multiple Choice

Suppose we have a zero-coupon bond that pays $1 after one year if the issuing firm is not in default. If the firm is in default the recovery rate is 40%. The one-year risk free interest rate in simple terms is 5% and the risk-neutral probability that the firm defaults is 10%. What is the fair credit spread on the bond (again, in simple terms) ?

A) 5.0%
B) 6.7%
C) 10.5%
D) 11.7%