a. Discuss the statement that it is easy to estimate the credit spread of a corporate bond because it could be done by simply comparing the bond's YTM with that of a Treasury bond that has identical cash flows.
b. There is a 0.5 percent probability of default by the year-end on a one-year bond issued at par by a particular corporation. If the corporation defaults, the investor will get nothing. Assume that a default-free bond exists with identical cash flows and liquidity, and the one-year yield on this bond is 4 percent. What yield should be required by risk-neutral investors on the corporate bond? What should the credit spread be?