Respuesta :
Answer and Explanation:
a. The computation of price (expressed as a percentage of the face​ value) is shown below:-
Price = Face value Ă· (1 + Yield to maturity)^Number of the compounding period
= $1,000 Ă· (1 + 0.0323)^1
= $1,000 Ă· 1.0323
= $968.71
Price expected as a percentage to a face value = Price Ă· Face value Ă— 100
= $968.71 Ă· $1,000 Ă— 100
= 96.87%
b. The computation of credit spread of AAA-rated corporate​ bonds is shown below:-
Credit spread = Yield of AAA-rated corporate bond - Yield of treasury bond
= 3.23% - 3.15%
= 0.08%
c. The computation of credit spread on B-rated corporate bonds is shown below:-
Credit spread = Yield of B-rated corporate bond - Yeld of treasury bond
= 4.94% - 3.15%
= 1.79%
d. The credit rating for a bond changes with its respective credit risk change. That implies the bond 's rating would be lower the lower risk, and likewise. Â
The investor is demanding higher returns on risky bonds for additional risk-taking. Hence the credit spread is widening as the rating of bonds falls with an increase in the risk.
