The following table summarizes yields to maturity on several 1-year, zero-coupon securities:<table role="presentation" class="rvTable" width="368"><colgroup style="box-sizing: border-box;"><col style="box-sizing: border-box;"/><col style="box-sizing: border-box;"/></colgroup><tbody style="box-sizing: border-box;"><tr style="box-sizing: border-box;" class="firstRow"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">Security</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">Yield</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">Treasury</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18"><span class="eqLabel fNormal" id="var_0" widgetid="var_0" aria-label="2.990" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">2.860%</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">AAA Corporate</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18"><span class="eqLabel fNormal" id="var_1" widgetid="var_1" aria-label="3.325" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">2.892%</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">BBB Corporate<span data-dojo-type="xl.player.controls.Tab" data-dojo-props="styleName:"center"" class="xlTab" id="xl_player_controls_Tab_2" widgetid="xl_player_controls_Tab_2" style="box-sizing: border-box; display: inline-block; overflow: hidden; margin: 0px 2px; vertical-align: bottom; width: 5px; height: 16px;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18"><span class="eqLabel fNormal" id="var_2" widgetid="var_2" aria-label="4.100" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">3.107%</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18">B Corporate</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;" height="18"><span class="eqLabel fNormal" id="var_3" widgetid="var_3" aria-label="4.896" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">3.950%</td></tr></tbody></table>a. What is the price (expressed as a percentage of the face value) of a 1-year, zero-coupon corporate bond with a AAA-rating and a face value of <span class="eqLabel fNormal" id="xl_eqeditor_EqLabel_115" widgetid="xl_eqeditor_EqLabel_115" aria-label="$ 1 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: transparent !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">$1,000? 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?Note: Assume annual compounding.

Question

In: Finance

The following table summarizes yields to maturity on several 1-year, zero-coupon securities:

Security

Yield

Treasury

AAA Corporate

BBB Corporate

B Corporate

a. What is the price (expressed as a percentage of the face value) of a 1-year, zero-coupon corporate bond with a AAA-rating and a face value of

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?

Note:

Assume annual compounding.

Solutions

Expert Solution

jeff jeffy answered 2 years ago

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