The following table summarizes the yields to maturity on several one-year, zero-

Question

The following table summarizes the yields to maturity on several one-year, zero-coupon securities: Security Treasury AAA corporate BBB corporate B corporate Yield (%) 3.07 3.15 4.20 4.85 a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? 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? a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? The price of this bond will be%(Round to three decimal places.)

Explanation / Answer

a.

Price of AAA rated zero coupon bond = $1,000 / (1 + 3.15%)

= $969.46

Price of AAA rated zero coupon bond is $969.46.

b.

credit spread for AAA rated = 3.15% - 3.07%

= 0.08%

credit spread for AAA rated corporate bond is 0.08%.

c.

credit spread for B rated = 4.85% - 3.07%

= 1.78%

credit spread for B rated corporate bond is 1.78%.

d.

As bond rating decrease from AAA to B, then credit spread of bond increase. this is becasue level of risk increase from AAA rated bond to B rated bond. As risk increase then yield of bond increase and so credit spread is also increase.

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