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Bond trading at premium or discount; maturity, yield, credit spread

1. Consider a five-year, default-free bond with annual coupons of 5% and a face-value of $1000.

a) Without doing any calculations, determine whether this bond is trading at a premium or at a discount. Explain.

b) What is the yield to maturity on this bond?

c) If the yield to maturity on this bond increased to 5.2%, what would the new price be?

2. The following table summarizes the yields to maturity on several one-year, zero-coupon securities:

Security Yield(%)
Treasury 3.1
AAA corporate 3.2
BBB corporate 4.2
B corporate 4.9

a) What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating?

b) What is the credit spread on AAA-rated corporate bonds?

c) What is the credit spread on B-rated corporate bonds?

d) How does the credit spread change wit the bond rating? Why?

Solution Preview

Answer 1:
a) The bond is default-free and so must be trading at the risk free rate. Thus, the bond will be trading at par.
b) The yield to maturity will be equal to the coupon rate which is 5%
c) If the yield to ...

Solution Summary

The solution goes into a great amount of detail regarding the question being asked. Step by step explanation is provided for each part of the question which makes it very easy to follow along for anyone with just a basic understanding of the concepts. Overall, an excellent response to the question being asked.