Question

In: Finance

Your firm has a credit rating of A. You notice that the credit spread for​ five-year...

Your firm has a credit rating of A. You notice that the credit spread for​ five-year maturity A debt is

86

basis points

0.86 %(0.86%).

Your​ firm's five-year debt has an annual coupon rate of

6.3%.

You see that new​ five-year Treasury notes are being issued at par with an annual coupon rate of

2.2%.

What should be the price of your outstanding​ five-year bonds?

Solutions

Expert Solution

Since credit spread shows the difference between yield on treasury notes and corporate bonds of the same maturity,

Credit spread = yield on 5-year corporate bond - yield on 5-year treasury notes

Yield on 5-year corporate bond = 0.86% + 2.2% = 3.06%

The price of the Bond is calculated in excel below

jeff jeffy answered 1 year ago
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