Bond 1 US Treasury note with a 2 coupon due in 5 years issued at a price of par ($100) Bond 2 ABC Corp note with a 4 coupon issued at a yield to maturity of 4 2 ABCs credit is rated BBB Both bonds were issued and will mature on the same date Coupons on both bonds are stated in annual terms above, but paid semi annually The Fed Funds rate is 0 75 Below is the benchmark US Treasury on the run Yield Curve on date of issuance 1y 1 00 2y 1 25 3y 1 50 5y 2 00 7y 2 50 10y 3 00 What is the Yield to Maturity of Bond 1 Was Bond 2 issued (sold) at a par, premium or discount price (You can answer this without knowing the specific price ) What do bond market participants call the difference between the yields to maturity of Bond 2 and Bond 1 What type of risk is most likely the largest component of this yield difference 2 Discount price Spread Default Risk Assume you purchased Bond 1 and held it for 3 years and the treasury yield curve is unchanged (rates are exactly the same as those listed above), and answer the following questions (36 points) a What is the new number of years to maturity for bond 1 b How many cash flow payment dates are left c What is the discount rate we should use to value Bond 1 in this new environment d Using the same Present Value of Future Cash Flows Model shown above to compute the new price of Bond 1 (show your work)

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Question: Bond #1: US Treasury note with a 2% coupon due in 5 years issued at a price of par ($100). Bond #2: ABC Corp note

Bond #1: US Treasury note with a 2% coupon due in 5 years issued at a price of par ($100). Bond #2: ABC Corp note with a 4% coupon issued at a yield to maturity of 4.2%. ABCs credit is rated BBB.

Both bonds were issued and will mature on the same date. Coupons on both bonds are stated in annual terms above, but paid semi-annually. The Fed Funds rate is 0.75%. Below is the benchmark US Treasury on-the-run Yield Curve on date of issuance:

1y 1.00% 2y 1.25% 3y 1.50% 5y 2.00% 7y 2.50% 10y 3.00%

What is the Yield to Maturity of Bond #1?
Was Bond #2 issued (sold) at a par, premium or discount price? (You can answer this without knowing

the specific price.)
What do bond market participants call the difference between the yields to maturity of Bond #2 and

Bond #1?
What type of risk is most likely the largest component of this yield difference?

2%
Discount price
Spread
Default Risk

Assume you purchased Bond #1 and held it for 3 years and the treasury yield curve is unchanged (rates are exactly the same as those listed above), and answer the following questions (36 points): a. What is the new number of years to maturity for bond #1? b. How many cash flow payment dates are left? c. What is the discount rate we should use to value Bond #1 in this new environment? d. Using the same Present Value of Future Cash Flows Model shown above to compute the new price of Bond #1 (show your work).

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