Suppose We Have a Zero-Coupon Bond That Pays $100 After

Multiple Choice

Suppose we have a zero-coupon bond that pays $100 after one year if the issuing firm is not in default. If the firm is in default the recovery rate is 50%. The simple risk-free interest rate for one year is 5% and the risk-neutral probability that the firm defaults is 10%. What is todayÕs fair credit spread for this bond?

A) 5.5%
B) 6.5%
C) 7.5%
D) 8.5%