Problem 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?
Problem 2. The following table summarizes the yields to maturity on several one-year, zero-coupon securities:
Security Yield(%)
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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?