The WSJ reports on December 4 that a company tied to a Chinese university, Peking University Founder Group (PUFG), failed to repay some bondholders on time. PUFG aims to repay the bonds within a grace period that ends next week, but bondholders are not very optimistic. Currently, PUFG zero coupon bonds that mature one year from today are trading at 500 yuan per 1000 yuan face value. Please assume the riskless interest rate is 4% p.a, annually compounded. a. What is the credit spread (expressed p.a. annually compounded) implied by the information above?

  

R = 1000/500 - 1 = 100%, R - r = 96%

Provide detailed answer an explanation for question b below 

b. Your own analysis reveals that the value of the company is 1000 yuan today, and it can increase to 2000 or decrease to 400, over 1 year. Please assume a simple capital structure in that the company has a (defaultable) debt contract outstanding in form of a zero coupon bond with face value 1000, maturing in one year. Also tradable is a bond without default risk. What is the implied credit spread (expressed p.a. as annually compounded) based on your analysis? 

Answer rating: 100% (QA)

a To calculate the credit spread implied by the information given we can use the formula Credit Spre... View the full answer