Question: The following table summarizes the yields to maturity on several one-year, zero-coupon securities: Security Yield (%) Treasury 3.1 AAA corporate 3.2 BBB corporate 4.2 B

The following table summarizes the yields to maturity on several one-year, zero-coupon securities:

Security Yield (%)

Treasury 3.1

AAA corporate 3.2

BBB corporate 4.2

B corporate 4.9

a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with an AAA rating?

b. What is the credit spread on AAA-rated corporate bonds?

c. What is the credit spread on B-rated corporate bonds?

d. How does the credit spread change with the bond rating? Why?


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