FRM Part I · FRM Exam Part I · Corporate Bonds
A one-year zero-coupon corporate bond with face value 100 trades at 94.00. The one-year risk-free rate is 3.00% with annual compounding. What is the credit spread, measured as the difference in annually compounded yields, closest to?
The credit spread is about 3.4%. The bond's yield is 100/94 minus 1, or 6.38%, and subtracting the 3% risk-free rate leaves roughly 3.38%. This is the extra yield compensating for default risk and other factors.
- A3.4%Correct
- B6.4%
- C3.0%
- D9.4%
Explanation
The corporate yield is 100/94 - 1 = 6.383%. Subtracting the 3.00% risk-free rate gives 3.38%, about 3.4%. The 6.4% option forgets to subtract the risk-free rate, and 3.0% is just the risk-free rate itself.
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