Question #35
Reading: Reading 28 Credit Analysis Models
PDF File: Reading 28 Credit Analysis Models.pdf
Page: 14
Status: Correct
Correct Answer: A
Question
Zack Ma is evaluating a five-year, 4% Zem bond. Ma has calculated the CVA on the bond to be $2.12 per $100 par. Current benchmark rates are flat at 3%. The credit spread on the bond is closest to:
Answer Choices:
A. 0.21%
B. 0.97%
C. 0.46%
Explanation
First calculate the VND: N=5, PMT = 4, FV = 100, I/Y = 3. PV = 104.58 = VND.
Value of risky bond = VND – CVA = 104.58 – 2.12 = 102.46
YTM on risky bond: N=5, PV = -102.46, PMT = 4, FV = 100, I/Y = 3.46%
Credit spread = YTM (risky) – YTM (risk-free) = 3.46% – 3% = 0.46%.