Question

A​ BBB-rated corporate bond has a yield to maturity of 9.1 %. A U.S. treasury security has a yield to maturity of 7.3 %. These yields are quoted as APRs with semiannual compounding. Both bonds pay​ semi-annual coupons at a rate of 7.5 % 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?

Answer 1

	a	TREASURY BOND
	A	Assume face value of Bond	$100
	B	Interest Rate (APR)	7.50%
	Pmt=A*(B/2)	Semi annual coupon payment	$3.75
	Nper	Number of semi annual coupon	10	(5*2)
	Rate	Semi annual interest yield	3.65%	(7.3/2)
	Fv	Payment at maturity	$100
	PV	Price of Treasury Bond	$100.83	(Using PV function of excelwith Rate=3.65%,Nper=10,Pmt=-3.75,Fv=-100)
	b	CORPORATE BOND
	A	Assume face value of Bond	$100
	B	Interest Rate (APR)	7.50%
	Pmt=A*(B/2)	Semi annual coupon payment	$3.75
	Nper	Number of semi annual coupon	10	(5*2)
	Rate	Semi annual interest yield	4.55%	(9.1/2)
	Fv	Payment at maturity	$100
	PV	Price of Corporate Bond	$93.69	(Using PV function of excelwith Rate=4.55%,Nper=10,Pmt=-3.75,Fv=-100)
	c	CREDIT SPREAD
		Credit Spread =(Yield toMaturity of Corporate Bond)-(yield tomaturity of trasury bond)
		Credit Spread on BBB Rated Corporate Bond	1.80%	(9.1-7.3)%
		Credit Spread on BBB Rated Corporate Bond	180	Basis Point