A BBB-rated corporate bond has a yield to maturity of 5.4%. A U.S. treasury secu

Question

A BBB-rated corporate bond has a yield to maturity of 5.4%. A U.S. treasury security has a yield to maturity of 4.1%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 4.7% 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? a. What is the price (expressed as a percentage of the face value) of the treasury bond? The price of the treasury bond as a percentage of face value is %. (Round to three decimal places.) b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? The price of the BBB-rated corporate bond as a percentage of face value is % Round to three decimal places c. What is the credit spread on the BBB bonds? The credit spread on the BBB bonds is %. (Round to two decimal places.)

Explanation / Answer

a. 102.688%

Using financial calculator BA II Plus - Input details:

#

I/Y = Yield = Yield / 2 =

2.05

FV = Future Value =

-$1,000

N = Number of coupon =

10

PMT = Coupon / 2 =

-$23.50

CPT > PV = Bond Value =

$1,026.88

Now,

Price of treasury bond as percentage of face value = Bond Value / Face Value = $1,026.88 / $1,000

Price of treasury bond as percentage of face value = 102.688%

b. 96.968%

Bond value for BBB-Rated bond

Using financial calculator BA II Plus - Input details:

#

I/Y = Yield = Yield / 2 =

2.70

FV = Future Value =

-$1,000

N = Number of coupon =

10

PMT = Coupon / 2 =

-$23.50

CPT > PV = Bond Value =

$969.68

Price of treasury bond as percentage of face value = Bond Value / Face Value = $969.68 / $1,000

Price of treasury bond as percentage of face value = 96.968%

c.

Credit spread = Yield of BBB-rate bond – Yield of Treasury bond

Credit spread = 5.4% - 4.1%

Credit spread = 1.30%

Using financial calculator BA II Plus - Input details:

#

I/Y = Yield = Yield / 2 =

2.05

FV = Future Value =

-$1,000

N = Number of coupon =

10

PMT = Coupon / 2 =

-$23.50

CPT > PV = Bond Value =

$1,026.88

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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