CVA Calculation for Risky Bond – Solved Example

Question:

A 3-year corporate bond pays a coupon of 8% per annum (once a year). The term structure of risk-free interest rates is flat at 4% p.a. and is expected to stay unchanged in the future. If the risk-neutral conditional probability of default of the issuer is 2% for a 1-year period and the recovery rate in event of default is 40% (assumed constant), the credit spread of this bond is CLOSEST to: