q1: A BBB-rated corporate bond has a yield to maturity of 11.1%. A U.S. treasury
ID: 1174667 • Letter: Q
Question
q1:
A BBB-rated corporate bond has a yield to maturity of 11.1%. A U.S. treasury security has a yield to maturity of 9.7%. These yields are quoted as APRs with semiannual compounding. Both bonds pay? semi-annual coupons at a rate of 10.4% and have five years to maturity.????
a. The price of the treasury bond as a percentage of face value is ???%. ?(Round to three decimal? places.)
b. What is the price? of the? BBB-rated corporate? bond expressed as a percentage of the face? value is ??%? (Round to three decimal? places.)
c. What is the credit spread on the BBB? bonds?
Explanation / Answer
a.
Price of treasury bond = $1,027.224
Using financial calculator BA II Plus - Input details:
#
I/Y = Rate or yield / frequency of coupon in a year = 9.7/2 =
4.850000
PMT = Coupon rate x FV / frequency = 10.4% x -1000/2
-$52.00
N = Number of years remaining x frequency = 5 x 2 =
10.00
FV = Future Value =
-$1,000.00
CPT > PV = Present value of bond
$1,027.224
b.
Price of BBB corporate bond = $973.681
Using financial calculator BA II Plus - Input details:
#
I/Y = Rate or yield / frequency of coupon in a year =
5.550000
PMT = Coupon rate x FV / frequency = = 10.4% x -1000/2
-$52.00
N = Number of years remaining x frequency = 5 x 2 =
10
FV = Future Value =
-$1,000.00
CPT > PV = Present value of bond
$973.681
c.
Credit spread = BBB corporate bond yield to maturity - Treasury bond yield to maturity
Credit spread = 11.1% - 9.7%
Credit spread = 1.400% or 1.40%
Using financial calculator BA II Plus - Input details:
#
I/Y = Rate or yield / frequency of coupon in a year = 9.7/2 =
4.850000
PMT = Coupon rate x FV / frequency = 10.4% x -1000/2
-$52.00
N = Number of years remaining x frequency = 5 x 2 =
10.00
FV = Future Value =
-$1,000.00
CPT > PV = Present value of bond
$1,027.224
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