The probability of default on a bond is 3%, and in the case of default,...

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)