A BBB-rated corporate bond has a yield to maturity of 5.7%. A U.S. treasury secu

Question

A BBB-rated corporate bond has a yield to maturity of 5.7%.
A U.S. treasury security has a yield to maturity of 3.8%.
These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 4.4% and have five years to maturity.
a. What is the price (expressed as a percentage of the face value) of the treasury bond?
b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond?
c. What is the credit spread on the BBB bonds?

Explanation / Answer

a) N = 10, FV = 1000, rate = 1.9%, PMT = 22

use PV function in Excel to find price and divide by 10 to express it as a percentage of face value

price as % of face value = 102.71

b) replace rate with 5.7%/2 and follow similar procedure

price as % of face value = 94.41

c. credit spread = 5.7% - 3.8% = 1.90%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.