Consider the following four debt securities, which are identical in every charac

ID: 2665925 • Letter: C

Question

Consider the following four debt securities, which are identical in every characteristic except as noted:

W: A corporate bond rated AAA

X: A corporate bond rate BBB

Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X

Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y.

List the bonds in the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest. Explain your work.

Stock price (beginning) = $50

Stock price (Ending) = $53

Annual dividend payment = $2 per share

Current Yield = [Annual Dividend payment / Current stock price]

Current Yield = [$2 / $53]

Current Yield = 0.0377 (or) 3.77%

Capital gains yield = [$53 - $50] / $50

Capital gains yield = 0.06 (or) 6%

Required Rate of Return = Current Yield + Capital gains yield

Required Rate of Return = [3.77% + 6%]

Required Rate of Return = 9.77%

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