A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. treasury secu

Question

A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. treasury security has a yield to maturity of 6.5%. These yields are quoted as APRs with semi-annual compounding. Both bonds pay semiannual coupons at a rate of 7.0% and have five years to maturity. What is the price (expressed as a percentage of the face value) of the treasury bond? What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? What is the credit spread on the BBB bonds? 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.) 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.) What is the credit spread on the BBB bonds? The credit spread on the BBB bonds is (Round to two dec

Explanation / Answer

a)

Treasury Bond

Let the par value of bond be $ 1000.

Rate of interest = 7 / 2 = 3.5 % (Compounded Semi-annually), Yield to maturity = 6.5 / 2 = 3.25 % and Time period = 5 *2 = 10 Years

Price of Treasury Bond = 1000 * 3.5 % * Cumulative Present Value Factors for 10 Years @ 3.25 % + 1000 * Present Value Factor for Year 10 @ 3.25 %

= 1000 * 3.5% * 8.4224 + 1000 * 0.7263

= 35 * 8.4224 + 1000 * 0.7263

= $ 1021.084 (approx)

Conclusion:- Price of Treasury Bond = $ 1021.084 (approx)

b)

BBB-rated Corporate Bond

Let the par value of bond be $ 1000.

Rate of interest = 7 / 2 = 3.5 % (Compounded Semi-annually), Yield to maturity = 8.2 / 2 = 4.1 % and Time period = 5 *2 = 10 Years

Price of BBB-rated Corporate Bond = 1000 * 3.5 % * Cumulative Present Value Factors for 10 Years @ 4.1 % + 1000 * Present Value Factor for Year 10 @ 4.1 %

= 1000 * 3.5% * 8.0707 + 1000 * 0.6691

= 35 * 8.0707 + 1000 * 0.6691

= $ 951.575 (approx)

Conclusion:- Price of BBB-rated Corporate Bond = $ 951.575 (approx)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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