Using Term Structure Derivation of Credit Risk on a One-Year

question 56

True/False

Using term structure derivation of credit risk on a one-year loan, it is possible to simply calculate the risk premium on the loan by deducting the market rate for a one-year zero-coupon government bond from the market rate for a one-year zero-coupon corporate bond of a credit rating equivalent to that of the prospective borrower.

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Definitions:

Exercise Price

The cost at which the person holding the option has the right to purchase (in the case of a call option) or sell (in the case of a put option) the underlying asset.

Underlying Stock

This refers to the stock on which derivative contracts, such as options and futures, are based.

American Call

A type of call option that can be exercised at any time before its expiration date.

European Call

An option contract that gives the holder the right, but not the obligation, to buy a specific asset at a specified price within a fixed period, applicable only at the expiration date.