Spreads and default risk John Garcia is trying to assess whether the 3% spread on the B-rated bond reflects the right default risk for the bond in the portfolio. He assesses that the company that has sold the bond in his portfolio has a market value of assets of 500 million, face value of leverage is 70% of assets, and the volatility of assets is 35% a year. What is the spread on debt when you use Merton's model? Assume 7-year maturity of debt. The risk-free rate is equal to the implied rate from the zero-coupon curve in question 1. Provide the computations that allow you to arrive at the computed spread