A corporate bond has a cost of 5.5%, a maturity of 3 years and a credit rating of A. The 3-year risk-free rate is 6% and the corporate tax rate is 30%.
What is the credit spread of the bond in basis points (to the nearest whole number)?
________
The correct answer is: 186 basis points.
Using the formula:
Credit spread = Cost of debt capital - risk free rate
(1 - tax rate)
Credit spread = 5.5 - 6
0.7
Credit spread = 186 basis points
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