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Due to economic distress, a company has a 15% chance of defaulting over the next year....

Due to economic distress, a company has a 15% chance of defaulting over the next year. If it defaults, bondholders will only be able to keep 60% of their principal. What is the one-year credit spread for the company?

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Answer #1

Credit spread of the company can be calculated by following formula-

=( 1-Recovery Rate)* Default Probability

=[(1-60%)*15%]

=[40%*15%]

= .06 or 6%

Credit spread for company is .06

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