Following data is given:
Exhibit 1
Bond Data for Bay Corporation
Par value $5,000,000 Maturity 4.0 years Risk-free rate; zero-coupon yields 1.25% Bay Corp credit spread 0.75% Bond type Zero coupon
Now it is said to assume continuously compounded… so I assume the risk free rate given is annualized so I would convert it with ln(1+Rf), but no, it’s already the continuously compounded risk free rate. --> if nothing is said how can I assume that this time the risk free rate is already the continously compounded risk free rate?
This is another example of how CFA is very ambiguous sometimes… they expect people choose the right answer even if the question is not stated in a clear and concise manner.