Given a 1 year corporate bond issued at par, with a 0.75%probability of default and...

Given a 1 year corporate bond issued at par, with a 0.75% probability of default and 25% recovery rate, what is the credit spread for the risky bond if an identical duration sovereign bond has a 5% yield?

Expert Solution

Calaculation of Credit spread for Corporate bond:

Given:

Recovery rate = 25% = 0.25

Probability of default = 0.75% = 0.0075

Credit Spread

= (1 - Revovery rate) × Default probability

= (1 - 0.25) × 0.0075

= 0.75 × 0.0075

= 0.005625

= 0.5625%

ekkarill92 answered 2 years ago

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