hard · Corporate Credit Analysis ratings
A corporate bond is trading at a Z-spread of 400 bp. The analyst calculates the expected loss component of the spread to be 110 bp based on historical default rates and recovery assumptions.
What does the remaining 290 bp of the spread primarily represent in the context of credit pricing?
- The probability of default (PD) in isolation, ignoring recovery
- Tax-exempt municipal yield treatment on the coupon
- The risk-free base rate embedded in the yield curve
- Risk premium for unexpected loss and liquidity premium
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