FRM Part I · FRM Exam Part I · Corporate Bonds
A 1-year zero-coupon corporate bond with face value USD 100 trades at USD 92.00. The 1-year risk-free rate is 3% with annual compounding. What is the bond's credit spread over the risk-free rate, using annual compounding?
The credit spread is about 5.70%. The bond's yield is 100/92 minus 1, or 8.70%. Subtracting the 3% risk-free rate leaves roughly 5.70%. Using the 8% price discount as the yield is wrong because the yield is measured on the price paid.
- A5.70%Correct
- B8.70%
- C8.00%
- D5.00%
Explanation
Yield = 100/92 - 1 = 8.696%. Spread = 8.696% - 3.00% = 5.696%, about 5.70%. The 8.70% option forgets to subtract the risk-free rate; 8.00% uses the discount from par rather than the yield.
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