Apple is rated AA. Your thesis is that AAPL 3½ (SA) 30yr, currently at a credit

Question

Apple is rated AA. Your thesis is that AAPL 3½ (SA) 30yr, currently at a credit spread of 82 bps, soon will trade at a credit spread which is the same as that of the average 30yr AA bond (see appendix). Suppose your thesis is correct, and Apple’s credit spread tightens immediately, then what will be the new price at which these bonds trade? Answer in base100 pricing to four decimals; i.e. xxx.xxxx

0yr 1yr 3yr 5yr 7yr 10yr 30yr UST 1.50 1.75 1.95 2.00 2.25 2.50 3.00

Average Credit Spreads, in BPS, for Generic Credit Ratings AAA AA A BBB 5yr 10 25 50 100 10yr 15 35 75 150 30yr 25 75 125 25

Explanation / Answer

Average credit spread for 30yr AA bond is 75 bps..(Given)

New price at which AAPL bonds will trade will be equal to 30 yr US treasury yield + 30 yr credit spread= 3.00 + 0.75= 3.75 %

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