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%
Correct Answer:
Verified
Correct Answer:
Verified
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