Question

A​ BBB-rated corporate bond has a yield to maturity of 7.7 %. A U.S. treasury security has a yield to maturity of 6.3 %. These yields are quoted as APRs with semiannual compounding. Both bonds pay​ semi-annual coupons at a rate of 7.3 % 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?

Answer 1

Answer:

The price as a percentage of the treasury stock is 104.23%

The price as a percentage of the BBB-rated corporate bond is 98.37%

The credit spread on the bond is 1.40%

Find detailed computations in the attached.

Explanation:

The credit spread on BBB-rated corporate bond is the difference between its effective interest rate and the interest rate on the U.S government treasury security,that is:

7.7%-6.3%=1.40%

Note that the par value of a bond is usually $1000.