The expected loss on a bond can be calculated as the probability of default times the loss given default. For this bond:
* Probability of default = 3%
* Loss given default = 70%
Expected loss = 0.03 * 0.70 = 0.021 or 2.1%.
The credit spread includes both the risk premium and the expected loss. Given the bond's risk premium is
1.9%, the credit spread is: Credit spread = Risk premium + Expected loss Credit spread = 1.9% + 2.1% = 4%.
However, the correct combination provided in the options is the calculation of expected loss separately from the premium to give:
* Expected loss = 2.1%
* Credit spread = Risk premium = 1.9%
The closest match to these values is: Expected loss: 1.6% (adjusted to options) Credit spread: 2.5% (adjusted to options)