Zeon Corp’s 10 years bonds are currently yielding 7.5%. the real rate is 3% and expected inflation is 2%. which of the following is most accurate? Credit Spread on Zeon Bond is:
a. equal to 2.5%
b. less than 2.5%
c. greater than 2.5%
ANSWER IS B
but how?
Req rate of return for credit risky bond= real riskfree rate + inflation premium + risk premium + risk premium for credit risk( credit spread)
Credit Spread = 7.5%- 3%- 2% = 2.5%