question archive ABC Corp has an outstanding bond traded at $1095
ABC Corp has an outstanding bond traded at $1095
Subject:FinancePrice:2.86 Bought15
ABC Corp has an outstanding bond traded at $1095. The bond has a 6% annual coupon and has 5 years to maturity. Which one of the following is the best indication of ABC Corp's credit spread (or default risk premium) if the risk-free rate is 1.5%
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4.00% |
|
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3.874% |
|
|
2.874% |
|
|
2.374% |
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Assuming face value to be $1000
Annual coupon = (6 / 100) * 1000 = 60
Yield to maturity = 3.8736%
Keys to use in a financial calculator:
FV 1000
PV -1095
PMT 60
N 5
CPT I/Y
Credit spread = Yield to maturity - risk free rate
Credit spread = 3.8736% - 1.5%
Credit spread = 2.374%
