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andrew-mc [135]
3 years ago
5

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

ng? 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 with the bond​ rating? Why?
Business
1 answer:
VikaD [51]3 years ago
8 0

Answer and Explanation:

a. The computation of price (expressed as a percentage of the face​ value) is shown below:-

Price = Face value ÷ (1 + Yield to maturity)^Number of the compounding period

= $1,000 ÷ (1 + 0.0323)^1

= $1,000 ÷ 1.0323

= $968.71

Price expected as a percentage to a face value = Price ÷ Face value × 100

= $968.71 ÷ $1,000 × 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.  

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.

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A company purchased a plant asset for $53,000. It has a salvage value of $3,000 and annual depreciation expense of $5,000. It ca
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The remaining useful life of the asset is = 10 - 3 = 7 years

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The straight line method of depreciation charges a constant depreciation expense through out the useful life of the asset. The formula for depreciation expense under this method is,

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a. $203.125

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Calculation to determine the net profit/loss on this option to the investor

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