find the approximate spread between AAA and BBB rated bonds. There are many sources you can...
find the approximate spread between AAA and BBB rated bonds. There are many sources you can utilize to find this data. Discuss why this spread exists. If a AAA and BBB rated bond have the same duration and convexity will they have the same level of interest rate risk? Why or why not?
Homework Answers
The credit ratings of AAA and BBB are the two ends of the ratings spectrum for investment-grade corporate bonds as provided by the Moody's rating agency. The yield difference between bonds with these ratings has historically indicated whether the economy was in a period of recession or expansion.
The credit-rating agencies Moody's and Standard & Poor's provide credit ratings on bond issuers and their bonds to give investors an idea of the investment reliability of the bonds, concerning the payment of interest and principal. AAA is the highest bond rating and indicates the safest bonds for investors. Bonds rated below BAA -- BBB from Standard & Poor's -- are considered to be non-investment grade. That makes the BBB rating the lowest investment grade rating. The lower the credit rating, the higher the yield a bond will pay.
Typical Yield Difference
If the economy is expanding at a normal rate, the yield spread between AAA and BBB bonds is usually in a range of 0.8 percent to 1.2 percent. From the start of 1960 through the end of 2010, the average spread between the two corporate bond rates was 1.02 percent. Using the monthly data from the Federal Reserve Bank of St. Louis, the minimum spread for that time period was 0.38 percent and the maximum spread was 3.38 percent.
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find the approximate spread between AAA and BBB rated bonds.
There are many sources you can...
Thank you! Problem 6-30 A BBB-rated corporate bond has a yield to maturity of 8.2%. A...
Thank you!
Problem 6-30 A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. Treasury security has a yield to maturity of 6.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semiannual coupons at a rate of 7% and have five years to maturity. Note: assume a $1,000 face value. Complete the stata below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you...
Berth Construction Inc. Issues 13-year, AA-rated bonds. What is the yield on one of these bonds?
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next four years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where is the security's maturity. The liquidity premium (LP) on all Berth Construction Inc.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Berth Construction Inc. Issues 13-year, AA-rated bonds. What...
The default spread can be measured by: The difference in yields between 10-year corporate bonds and...
The default spread can be measured by: The difference in yields between 10-year corporate bonds and 10-year T-Bonds with the same coupon rates The difference in yields between T-Notes and T-Bills The difference in yields between 20-year BB-rated muni bonds and 20-year BB-rated corporate bonds The difference between coupon rates and the yield-to-maturity The difference between nominal and effective interest rates on bonds
The prices of low-coupon bonds tend to be less sensitive to a given change in interest...
The prices of low-coupon bonds tend to be less sensitive to a given change in interest rates than high coupon bonds, other things held constant. O O True False There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the bond ratings get lower. O True or False What's TRUE regarding long-term and short-term bonds (assume they have the same par...
The comparative advantage argument is often used to explain the benefits of swaps. In the Excel...
The comparative advantage argument is often used to explain the benefits of swaps. In the Excel file, you will find the cost of fixed rate and floating rate for two companies that do not have the same credit quality. AAA company wants to borrow at floating rate, while the BBB company wants to borrow at fixed rates. a) Calculate the total gain (in terms of interest rates) that the two companies can achieve by entering into a swap between them....
Assuming that bond rating agencies, such as Moody’s and Standard & Poor’s, have rated the government bonds of the US, Canada, Switzerland, and Germany
Bloomberg.com - Markets Rates & Bonds 10 Year Government Bond Yields CountryYield United States 0.68 %Canada 0.76 %Mexico 7.3 0%Switzerland -0.38%a) Assuming that bond rating agencies, such as Moody’s and Standard & Poor’s, have rated the government bonds of the US, Canada, Switzerland, and Germany free of risk of default-with a grade of AAA - how do you explain the apparent differences between, the US bond rate on the one hand and the Swiss bond...
To fill out the first table, you will need to select 3 bonds with maturities between...
To fill out the first table, you will need to select 3 bonds with maturities between 10 and 20 years with bond ratings of "A to AAA," "B to BBB" and "C to CC" (you may want to use bond screener at the Web site linked above). All of these bonds will have these values (future values) of $1,000. You will need to use a coupon rate of the bond times the face value to calculate the annual coupon payment....
11) Which of the following typically has the lowest yield? A) 5-year AAA corporate bond B)...
11) Which of the following typically has the lowest yield? A) 5-year AAA corporate bond B) 2-year U.S. Treasury note C) Fed Funds D) 3-month U.S. Treasury bill 12) Debt instruments are also called: A) adjustable notes B) credit instruments C) perpetual securities D) interest rate swaps 13) Which of the following characteristic is NOT fixed on a coupon bond? A) Current yield B) Coupon rate C) Maturity D) Par amount 14) If you purchased a U.S. Treasury at a...
Suppose the inflation rate is expected to be 6.6% next year, 4.15% the following year, and...
Suppose the inflation rate is expected to be 6.6% next year, 4.15% the following year, and 2.75% thereafter. Assume that the real risk-free rate, r*, will remain at 2.45% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. a. Calculate...
Can you explain intuitively why the interest-rate risk is positively associated with maturity but negatively associated...
Can you explain intuitively why the interest-rate risk is positively associated with maturity but negatively associated with coupon rate of the debt instrument that you hold? How does the interest-rate risk vary with the level of interest rates? For example, during the recession when market interest rates are low, does the overall level of interest-rate risk become higher or lower? Imagine that you’re managing a portfolio of long- and short-term bonds. If you predict a rise in interest rates, how...
Thank you!
Problem 6-30 A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. Treasury security has a yield to maturity of 6.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semiannual coupons at a rate of 7% and have five years to maturity. Note: assume a $1,000 face value. Complete the stata below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you...
The default spread can be measured by: The difference in yields between 10-year corporate bonds and 10-year T-Bonds with the same coupon rates The difference in yields between T-Notes and T-Bills The difference in yields between 20-year BB-rated muni bonds and 20-year BB-rated corporate bonds The difference between coupon rates and the yield-to-maturity The difference between nominal and effective interest rates on bonds
The prices of low-coupon bonds tend to be less sensitive to a given change in interest rates than high coupon bonds, other things held constant. O O True False There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the bond ratings get lower. O True or False What's TRUE regarding long-term and short-term bonds (assume they have the same par...
The comparative advantage argument is often used to explain the benefits of swaps. In the Excel file, you will find the cost of fixed rate and floating rate for two companies that do not have the same credit quality. AAA company wants to borrow at floating rate, while the BBB company wants to borrow at fixed rates. a) Calculate the total gain (in terms of interest rates) that the two companies can achieve by entering into a swap between them....
11) Which of the following typically has the lowest yield? A) 5-year AAA corporate bond B) 2-year U.S. Treasury note C) Fed Funds D) 3-month U.S. Treasury bill 12) Debt instruments are also called: A) adjustable notes B) credit instruments C) perpetual securities D) interest rate swaps 13) Which of the following characteristic is NOT fixed on a coupon bond? A) Current yield B) Coupon rate C) Maturity D) Par amount 14) If you purchased a U.S. Treasury at a...
Suppose the inflation rate is expected to be 6.6% next year, 4.15% the following year, and 2.75% thereafter. Assume that the real risk-free rate, r*, will remain at 2.45% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. a. Calculate...
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