Thread starter
#1

Hi David,

I have a fairly basic question but it's been bugging me. I have found that some people use a different formula to compute credit spread, namely:

1-(1+risk free yield)/(1+risky yield)

The difference in result with formula of -1/T*ln(D/F)-Rf is often not massive but it has already led me to choose wrong answers when looking at questions.

For instance, here was a question: zero coupon bond, 1 year remaining to maturity, currently trading at 85% of face value, Rf=2%.

-> Method 1: I compute the yield of the bond at 17.64%, and that gives a spread of 13.3% = 1-1.02/1.1764

-> Method 2: straightforward from the notes, -ln(0.85)-0.02=14.25%

So, which one is right? (The book I have says 13.3%) And where does the difference come from?

Many many thanks in advance!

Clement

I have a fairly basic question but it's been bugging me. I have found that some people use a different formula to compute credit spread, namely:

1-(1+risk free yield)/(1+risky yield)

The difference in result with formula of -1/T*ln(D/F)-Rf is often not massive but it has already led me to choose wrong answers when looking at questions.

For instance, here was a question: zero coupon bond, 1 year remaining to maturity, currently trading at 85% of face value, Rf=2%.

-> Method 1: I compute the yield of the bond at 17.64%, and that gives a spread of 13.3% = 1-1.02/1.1764

-> Method 2: straightforward from the notes, -ln(0.85)-0.02=14.25%

So, which one is right? (The book I have says 13.3%) And where does the difference come from?

Many many thanks in advance!

Clement

## Stay connected