Question

The following table summarizes yields to maturity on several 1-year, zero-coupon securities:

Security	Yield
Treasury	2.860%
AAA Corporate	2.892%
BBB Corporate	3.107%
B Corporate	3.950%

a. What is the price (expressed as a percentage of the face value) of a 1-year, zero-coupon corporate bond with a AAA-rating and a face value of

$1,000?

b. What is the credit spread on AAA-rated corporate bonds?  

c. What is the credit spread on B-rated corporate bonds?

d.  How does the credit spread change with the bond rating? Why?

Note:

Assume annual compounding.

Answer 1