FIXEDINCOMEMSCINFMI - Knowledge QUIZZ_3

QUIZZ 3
1.
Issuer

Rating

YTM

GE
Mobil Corp
Southern Bell
Bell Telephone
American Airlines

AAA
AA
AAA
AA
BBB

7.87

7.77
8.60
8.66
9.43

Spread to
Treasury
50
40
72
78
155

Years
10
10
30
30
30

a)
b)
c)
d)
e)

What does rating mean ? (1 point)
Which of the following 5 bonds has the greater credit risk? Why? (0.5 points)
What is meant by spread? (1 point)
Why is the Treasury market used as the benchmark?
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
6 months
9 months
1 year

Zero coupon rates
3.60%
3.80%
4%

Now, we consider bonds priced by the market until the 2 year maturity :
MATURITY
COUPON
1 ½ year
4%
2 year
4.5%

2 ½ year
3.5%
Using the bootstrapping method, calculate (and show calculations) the 11/2
1/2
year zero rates (bonds pay twice a year) (9 points)

PRICE
102.8
102.5
98.3
year , 2 year and 2