Question

Given the following information relating to the yields to maturity on several one- year, zero-coupon bonds: Bond Yield (%) US Treasury 3.0 AAA Corporate 3.3 A Corporate 3.9 BB Corporate 4.8 a. Find the price of a one-year, zero-coupon corporate bond with a AAA rating. b. Find the credit spread on the AAA-rated corporate bonds. c. Find the credit spread on the A-rated corporate bonds. d. Find the credit spread on the BB-rated corporate bonds. e. In what way does the credit spread change with the bond rating?

Answer 1

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BOND - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Dr Wrap Text General File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste BI U DA E = 5 Format Painter Clipboard Font V219 Σ AutoSum : A Fill 2 Sort & m Find & st Fat Merge Center $ % , .0 .00 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Clear Select Filter Editing Alignment Number Cells W X Y 219 220 PRICE OF ONE YEAR ZERO COUPON PRICE = 100/(1+ RATE) = 100/(1+0.033) = 221 96.81 [rounded to 2 decimals] 0.30% CREDIT SPREAD ON AAA RATED CORPORATE BONDS = 3.3% -3% = [yield on AAA rated bond - Treasury yield] 0.90% CREDIT SPREAD ON A RATED CORPORATE BONDS = 3.9% - 3% = [yield on B rated bond - Treasury yield] 222 223 224 225 226 227 228 229 230 231 232 233 234 H Rea 1.80% CREDIT SPREAD ON BB RATED CORPORATE BONDS = 4.8% -3% = [yield on BB rated bond - Treasury yield] THE CREDIT SPREAD INCREASES AS THE BOND RATING FALLS THE BASIC REASON BEHIND THIS IS THAT LOWER RATED BONDS ARE RISKIER Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE 510 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund YIELD SPOT ferences 54 55 I 56 BOI 150% 1a e 9 3 3 Kw INA 2 Form294.* to ENG 2 0 07:57 01-12-2019 O. . . . 0 ENG * 4