1. Ollie said to Wally, "Well, if you are so smart than answer me this - is the yield of bonds with credit risk higher than that of otherwise identical default-free bonds? If so, why? If not, why not?". (3 marks)
2. Your lunch break is done - and you know need to return to your desk. Your boss has given you an assignment. The table below shows various bond prices at different maturity levels for zero coupon bonds. Based on this information, how would you describe the shape of the yield curve - is it: flat, upward sloping, downward sloping, generally flat or is there is not enough information present to make a determination? What does this shape mean? Note that the bonds all have $1,000 face value. (10 marks)

maturity	price
1	950.24
2	900.70
3	860.38
4	820.27

3. Your boss is pleased - and your reward is more work. He asks you go address this question - the current yields for zero-coupon bonds with varying maturities are outlined in the table below. What is the forward rate from the end of year 2 to the end of Year 3? What does this rate denote? (5 marks)

Maturity (Years)	Yield
1	2.75%
2	3.25%
3	3.65%
4	4.00%
5	4.15%

4. Your boss indicates that he may be purchasing bonds as an investment. He asks you to comment: Firm A issues ten-year bonds with a coupon rate of 6.5%, paid semi-annually. The credit spread for this firm's ten-year debt is 0.8%. New ten-year Treasury notes are being issued at par with a coupon rate of 5%. What should the price of the firm's outstanding ten-year bonds be per $100 of face value? (4 marks)

Answer rating: 100% (QA)

Answer 1 Bonds with credit risk typically offer higher yields compared to otherwise identical defaul... View the full answer