The article highlights an important relationship between the corporate bond yields and the U.S. Treasury yields. When demand for Treasuries of corporate bond yields because they are riskier and increases, prices rise and yields . All else being equal, this leads to the their yields are than U.S. Treasury yields. However, this does not necessarily imply that particular changes in the Treasury yield will lead to similar changes in the corporate bond yields. A corporate bond with a narrow yield spread and high credit rating will offer a relatively ▼return thus the value of the fixed- when the bond is purchased. However, if the yield spread widens, the price of the bond will income asset class in the investor's portfolio.
The article highlights an important relationship between the corporate bond yields and the U.S. Treasury yields. When demand for Treasuries of corporate bond yields because they are riskier and increases, prices rise and yields . All else being equal, this leads to the their yields are than U.S. Treasury yields. However, this does not necessarily imply that particular changes in the Treasury yield will lead to similar changes in the corporate bond yields. A corporate bond with a narrow yield spread and high credit rating will offer a relatively ▼return thus the value of the fixed- when the bond is purchased. However, if the yield spread widens, the price of the bond will income asset class in the investor's portfolio.
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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Transcribed Image Text:On April 25, 2011, the Fed announced that short-term interest rates would be kept near zero through late 2014. Because corporate
bonds are indexed to Treasury yields and the Treasury yield hit nearly all-time lows, issuing conditions became conducive for
investment-grade borrowers.
Europe's debt crisis fueled the demand for relatively safer U.S. securities, and the market became more confident that Europe's crisis
would not significantly disrupt recovery of the world's largest economy.
This triggered issuers to announce investment-grade supply benefiting from the low borrowing costs. Companies such as IBM, Procter &
Gamble, Petroleo Brasileiro SA, and Berkshire Hathaway announced more than $15.5 billion debt offerings as yields approached record
lows.
The spread between the Treasury bonds and investment-grade bonds was hovering at narrow levels, making it attractive for issuers to
tap into low borrowing costs. According to a Business Week story, "Yields have fallen to 3.55 percent, the lowest level since touching
3.53 percent on Aug. 10, and within 10 basis points of a record low 3.45 on Aug. 4, according to the Bank of America Merrill Lynch U.S.
Corporate Master Index."
Another factor contributing to the rising issues of investment-grade bonds was purchasers' eagerness to invest in high-quality securities.
Sales of debt offerings had fallen 19% from the year before, and that made investors eager to spend cash on offerings.
Transcribed Image Text:The article highlights an important relationship between the corporate bond yields and the U.S. Treasury yields. When demand for Treasuries
of corporate bond yields because they are riskier and
. All else being equal, this leads to the
increases, prices rise and yields
their yields are
than U.S. Treasury yields. However, this does not necessarily imply that particular changes in the Treasury yield will lead
to similar changes in the corporate bond yields. A corporate bond with a narrow yield spread and high credit rating will offer a relatively
thus
return
the value of the fixed-
when the bond is purchased. However, if the yield spread widens, the price of the bond will
income asset class in the investor's portfolio.
I
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