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A BBB-rated corporate bond has a yield to maturity of 8.2%. A US Treasury security has a yield to maturity of 6.5%. These yields are quoted as APR's with semiannual compounding. Both bonds pay semiannual coupons at a rate of 7% 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?
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A BBB-rated corporate bond has a yield to maturity of 8.2%. A US Treasury security has a yield to maturity of 6.5%. These yields are quoted as APR's with semiannual compounding. Both bonds pay semiannual coupons at a rate of 7% and have five ...
This solution is comprised of a detailed explanation to answer what is the price (expressed as a percentage of the face value) of the Treasury bond.
Concepts of FV, NPV, annuities, risk, bonds, US Treasuries
1. A new SUV costs $33,000. You must pay 6% sales tax. You will put 10% of this total as a down payment.
For 60 months, you must borrow at an annual rate of 10%.
What annual rate would have the same payments stream at 48 months?
(Payments at 10% for 60 months = "X" % for 48 months).
2. A rare painting increases in value 3% each year.
You bought it for $50,000 by financing $40,000 at 6% for 30 years (use annual compounding).
What is the painting's value at the end of 5 years?
3. What is the total equity achieved in #2 above after 5 years? (Market value less loan amount)
4. Say a college education costs $40,000 on average.
Say an uneducated person earns, on average, $25,000 per year
Say an educated person earns, on average, $48,000 per year.
What is the present value of the benefit of education, if you used an 8% rate and 40 years?
Cash 0 Accounts Payable
Accounts receivable Long-term Debt 60,000
Inventories Common Stock
Fixed Assets Retained Earnings 97,500
Total Assest 300,000 Total Liabilities and Equity
Sales Cost of Goods Sold
Debt ratio 50%
Current Ratio 1.8X
Total asset Turnover 1.5X
Days sales Outstanding 36.5 (Based on 365 day year)
Gross Profit [ (Sales -COGS)/ Sales ] 25%
Inventory Turnover 5X
5 What is annual sales figure?
6 What is the COGS?
7 How much cash does the company report?
8 What are the A/P?
Maturity Treasury Bond AA-rated BBB-rated
1 5.50% 6.70% 7.40%
5 6.10% 7.40% 8.10%
10 6.80% 8.20% 9.10%
20 7.40% 9.20% 10.20%
30 7.70% 9.80% 11.10%
(Note: a basis point is 1/100th of a percent; or 0.01%)
9 How many basis points are the riskiest bonds trading over treasuries in the 20 year spectrum?
10 How many basis points are gained by selling a 5-yr US Treasury and buying a 30-yr BBB?
11 What maturity has the biggest spread between high grade corporates and low grade corporate bonds?
12 Suppose you purchase a 10 US Treasury bond and held it for 5 years.
Further suppose that this chart does not change for 5 years (or in 5 years this is what exits).
If you hold the bond for that entire period and sold it at that time, what would be your holding period yield?