A five-year 2.4% defaultable coupon bond is selling to yield 3% (Annual Percent Rate and semi-annual compounding).
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Question:
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.
rate of return on bonds is 2.44% per annum
Value of bond after two years = 97.193
c) Decompose the return into two components attributable to moving to maturity and the
increase in the credit spread.
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