QUIZZ 3
1.
Issuer Rating YTM Spread to
Treasury Years
GE AAA 7.87 50 10
Mobil Corp AA 7.77 40 10
Southern Bell AAA 8.60 72 30
Bell Telephone AA 8.66 78 30
American Airlines BBB 9.43 155 30
a) What does rating mean ? (1 point)
b) Which of the following 5 bonds has the greater credit risk? Why? (0.5 points) c) What is meant by spread? (1 point)
d) Why is the Treasury market used as the benchmark?
e) What is the yield spread between the Southern Bell and the Bell telephone bond issue? (0.5 points)
f) What can the spread between the Southern Bell and the Bell telephone reflect? (1 point)
g) The Mobil Corp issue is not callable. However the GE is callable. How dos this information help you in understanding the spread between the 2 issues? (1 point) h) American Airlines is not a callable bond. Southern Bell is not a callable issue neither.
What is the yield spread between these 2 issues and what does it reflect ? (1 point)
2.The yield spread between 2 corporate bonds reflects more than just differences in their credit risk. What 4 other factors would the spread reflect? (2 points)
3. What does the Treasury yield curve show ? (1 point)
4.What does an inverted yield curve mean and reflect? (2 points)
5. Suppose we know from market prices the following zero rates :
Maturity Zero coupon rates
6 months 3.60%
9 months 3.80%
1 year 4%
Now, we consider bonds priced by the market until the 2 year maturity :
MATURITY COUPON PRICE
1 ½ year 4% 102.8
2 year 4.5% 102.5
2 ½ year 3.5% 98.3
