Question #2
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 1
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
The break-even inflation rate is expected to be 2% over the next year. What is the credit spread for a 2% annual pay corporate bond maturing in one year with a market price of $96.91 ($100 par) if the real risk-free rate of return over the next year is 1%?
Answer Choices:
A. 2.25%
B. 0.19%
C. 2.00%
Explanation
The YTM on the corporate bond is (102/96.91) – 1 = 5.25%.
Credit spread = Yield - BEI - R = 5.25% - 2% - 1% = 2.25%