Question: Johnson and Johnson (JNJ), rated AAA by S&P, issues an 8-year $1000 par value bond that pays semi-annual coupons. Coupon rate is 3.2%. The bond

Johnson and Johnson (JNJ), rated AAA by S&P, issues an 8-year $1000 par value bond that

pays semi-annual coupons. Coupon rate is 3.2%. The bond is priced at $1096.59.

At the same time Valero Corporation (rated BBB by S&P) issues a similar bond with same

maturity, par value, and coupon rate and frequency. The BBB-AAA spread is 90 basis points.

Find the bond price of Valero Corporation.

[Hint: First find the semi-annual yield of the JNJ bond. Then annualize the yield. Using the

spread, find out the annualized yield of Valero bond. From which you can calculate the semi-

annual yield of the Valero bond. Now, find the price of the Valero bond

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