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Textbook Questions:
Ch 16: 3, 4, 8, 9, 14, 15
3.
Issuer
Rating
Corporation
triple
A
Corporation
double
B
Yield (%)
Spread (bps)
7.87
50
Treasury
benchmark
10
A
7.77
A
Corporation
triple
C
10
40
8.60
72
8.66
78
30
A
Corporation
double
D
A
Corporation
triple
E
30
9.43
155
30
A
For the corporate bond issues reported in the table above, answer the following questions:
a. Should a triple-A-rated bond issue offer a higher or lower yield than a double-A-rated bond
issue of the same maturity?
Ans:
Lower yield
b. What is the spread between the corporation A’s issue and corporation B’s?
Yield spread= Corporation A yield =7.87% -
Corporation B yield
7.77%
=0.1% or 0.001
c. Is the spread reported in part (b) consistent with your answer to part (a)?
Yes, given the fact that corporation A has triple A bond rate compared to corporation B, it
would definitely result to a lower yield.
d. The yield spread between these two bond issues reflects more than just credit risk. What other
factors would the spread reflect?
There are other possible factors that could affect the spread including type of issuer,
perceived credit worthiness, maturity of the instrument, provisions, taxability and liquidity
of security.
e. Corporation B’s issue is not callable. However, corporation A’s issue is callable. How does
this information help you understand the spread between these two issues?
Since corporation A is callable it means that it will cause the investors to demand higher
return on corporation A’s bond compared to identical bonds’ rate because it will dominate
the future interest rates. If they are not callable, on the other hand, the spread will not yield
to an extra premium required by investors if they will accept callable bond.
4. The following yields were reported on August 4, 2014, for U.S. Treasury securiti...
