A five-year 2.4% defaultable coupon bond is selling to yield 3% (Annual Percent Rate and semi-annual compounding). The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its current credit spread is 3% - 2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% while the risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is 100. b) If we define credit value as the difference between the prices of risk-free bond and defaultable bond, what is the current credit value of the bond, and what is it after two years?
A five-year 2.4% defaultable coupon bond is selling to yield 3% (Annual Percent Rate and semi-annual compounding). The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its current credit spread is 3% - 2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% while the risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is 100. b) If we define credit value as the difference between the prices of risk-free bond and defaultable bond, what is the current credit value of the bond, and what is it after two years?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A five-year 2.4% defaultable coupon bond is selling to yield 3% (Annual Percent Rate and semi-annual compounding). The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its current credit spread is 3% - 2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% while the risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is 100.
b) If we define credit value as the difference between the prices of risk-free bond and defaultable bond, what is the current credit value of the bond, and what is it after two years?
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