Reference no: EM132655964

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

Security             Yield (%)

Treasury              3.01%

AAA corporate      3.16%

BBB corporate         4.11%

B corporate            4.82%

Problem 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? (Round to the nearest cent.)

Problem b) What is the credit spread on AAA-rated corporate bonds? (Round to two decimal places.)

Problem c) What is the credit spread on B-rated corporate bonds? (Round to two decimal places.)

Problem d) How does the credit spread change with the bond rating? Why? (Select the best choice below.)

Option 1: The credit spread decreases as the bond rating falls because lower-rated bonds are riskier.

Option 2: The credit spread increases as the bond rating falls because lower-rated bonds are riskier.

Option 3: The credit spread increases as the bond rating rises because higher-rated bonds are riskier.

Option 4: The credit spread decreases as the bond rating rises because higher-rated bonds are riskier.